They already took 30% once, I don't want them to do it again.
January 5, 2010 8:42 AM   Subscribe

What's the best way to save money for the express purpose of later giving it to someone else?

My parents have had some rough financial years, and I've helped them out from time to time. I fear that they may have rougher times ahead, and I'm considering establishing some kind of savings account or fund so I can set aside money now to help them out later.

The question is: how can I do this while minimizing tax penalties and maximizing any interest/dividends? My understanding is that if I save up $10,000 (just throwing a random number out there) that I've already paid taxes on, and then give it to my parents in one lump sum, that they'll have to pay taxes on it again, resulting in a lot of money lost to taxes. Is this not so? Is there any way to avoid this? Some sort of special fund or account or other arrangement? If I do save money, is there a relatively risk-free method of maximizing interest while it waits to be given away? I know about CDs, but perhaps there are other options?

I live in the metro Detroit area, Michigan, USA. My parents do too. I have not decided whether to do this or not, but if I decide to do so I would prefer if I could do it without them knowing (accepting the relatively low chance of them coming across this question via Google or something).
posted by Vorteks to Work & Money (11 answers total)
You can give up to $12,000 a year, tax free to the recipient.

I am not a professional anything.
posted by shothotbot at 8:51 AM on January 5, 2010

Best answer: I am not a tax accountant, but there are IRS rules on gifts and the tax liabilities for them.
posted by jquinby at 8:52 AM on January 5, 2010

IANAFP (financial planner) but I think you should look into a trust? also I think $10,000 is the annual limit for gifts before you (not they) have to pay taxes on the gift.
posted by toodleydoodley at 8:52 AM on January 5, 2010

I also think you want to set up a trust.
posted by madcaptenor at 8:55 AM on January 5, 2010

Best answer: This is not tax advice, and I am not your attorney. You should look at this page on the IRS website, which provides an overview of how the gift tax works. You should consult your own tax, financial and legal advisors before you proceed, but as of 1/1/09, the yearly limit for gifts that would not be taxed is $13,000 per donor (giver) per donee (recipient). Thus you could give $13,000 to Mon and $13,000 to Dad each year, and they would not pay tax. Are you married? Mrs. Vorteks can also give $13,000 to each of your parents. Thus, each year, you could be transferring $52,000 per year, tax free. The money is yours until you gift it, so you will pay taxes on the interest/dividends/capital gains etc. There is no special account you can use to save on the taxes you owe.

Please note that the link in the answer marked best answer is out of date.

Please also note that state tax laws vary, so there may be state taxes to be paid. Again, this is not tax or legal advice, and you should consult your own advisors (penalties may apply for underpayments of tax); I am not your lawyer.
posted by Admiral Haddock at 8:57 AM on January 5, 2010 [1 favorite]

I recall that there's also a lifetime $1,000,000 exclusion. So unless you're planning on being awfully generous, you're not likely to run into tax liability on this any time soon. And it would be your tax liability, not theirs.
posted by jacquilynne at 8:58 AM on January 5, 2010

Though googling doesn't come up with anything recent on the lifetime exclusion -- so maybe it went away. I'd defer to Admiral Haddock who posted while I was writing and seems to be not just recalling things ;)
posted by jacquilynne at 8:59 AM on January 5, 2010

Oh, right, I am not an/your X for any relevant value of X.
posted by madcaptenor at 8:59 AM on January 5, 2010

Response by poster: @shothotbot, @toodleydoodley, @jquinby - Wow! I had no idea the gift limit was so high. I thought it was like $500 or something. I doubt I'll ever have more than $10,000 to give away. That is very good to know.

Just for the sake of argument though, what if I wanted to save up and give my parents $50,000 in one year? This is extremely unlikely unless I win the publisher's clearing house sweepstakes or something, but I'm still curious what my options would be. Does anyone know what you can do to set up a trust like toodleydoodley and madcaptenor suggested, and what the tax benefits would be?

If I wanted to, say, establish a Roth IRA in my parent's name, would that be possible?
posted by Vorteks at 9:00 AM on January 5, 2010

Best answer: You can give each of your parents $13,000 ($26,000 total) every year without them having to pay federal tax on it. This is the annual gift tax exclusion. Michigan does not charge a state gift tax.

More Here

To minimize risk and to maximize your interest, you might consider a bond ladder.
posted by Fuzzy Monster at 9:03 AM on January 5, 2010 [1 favorite]

While other suggestions here may be "better" in many senses, I currently have a eerily similar situation with my own parents, so I'll share what I've done about it.

I maintain co-signed checking, savings, and money market accounts with each parent at a bank I get free accounts with; my personal accounts are elsewhere. I am primary on all of these co-accounts, and get all statements. The parents have ATM/paper access to the checking/savings accounts, I keep it for the money market accounts and keep sole electronic access to everything. I deposit money into the money market account on my end over time (I never come close to the yearly tax maximum, but I'm not sure it would apply in a joint account anyway). I then transfer funds down to checking a few times a year, as/if needed. In the meantime, unused money builds up and at least makes a tiny return (the taxes I pay on that are the only additional expense of this system).

Note that in my case, sibling theft or bullied borrowing of money was/is a primary concern, as the original idea for these accounts arose from their need to protect small inheritances of theirs from their inability to say no. But beyond that, we all find it to be a much easier emergency-handling system than the previous frantic running around to banks and Western Union thing. For my own part, I find it relieving to know that should anything happen to me, there's still going to be money they can get to while the legal status of my own accounts is handled.

It's also nice to be able to make small amounts of money "appear" without fanfare, because otherwise you're just going to get more phone calls based on guilt.
posted by Pufferish at 11:17 AM on January 5, 2010

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