How Do I Pay Off A Mortgage For My Godson?
March 21, 2021 5:08 PM   Subscribe

I am going to inherit a bunch of money. More than I need. How can I pay off my godson's mortgage without causing him tax problems or ???

Paying off my godson's mortgage would be less than 4% of what I would inherit. He and his wife are go-getters - she worked three jobs while going to nursing school and he has worked his way up through a lot of jobs. They are good responsible people. I have no problem with helping them out.

I would like to pay off their mortgage to let them have more options for the future.

I have no kids nor spouse and no other considerations on how I spend this inheritance.
posted by ITravelMontana to Work & Money (15 answers total) 1 user marked this as a favorite
You're all in the US?
posted by clew at 5:10 PM on March 21, 2021

You could gift them the money and let them use it for that, I imagine. You probably would not have to pay taxes on it yourself, and neither would he, as far as I'm aware, unless you're talking about, oh, 10 million dollars.

Of course, if you aren't in the US, that will be a bit different.
posted by Alensin at 5:11 PM on March 21, 2021 [2 favorites]

Response by poster: Yes, in the US. Montana.
posted by ITravelMontana at 5:11 PM on March 21, 2021

Response by poster: I would be gifting the money and would guess under $200K
posted by ITravelMontana at 5:12 PM on March 21, 2021

Here's the IRS start page on the gift tax

As I read it, you can give your godson and spouse an annual gift of about $15k each (it varies year to year) without anyone owing taxes on it. If you want to give them more, tax occurs, but I don't see how the rate is calculated. It's normal for the giver to pay the tax.

I think Alensin must be thinking of the *estate* tax exclusion, which is in the ManyZeroes range. If you want to pay off your godson's mortgage now, I should hope the estate tax doesn't apply.
posted by clew at 5:16 PM on March 21, 2021 [1 favorite]

Response by poster: Thanks, clew. I appreciate that clarification.

I am aware of the 15K annual gift, because that is my current payment.

I'm just trying to figure out if I can do a $150K buyout.
posted by ITravelMontana at 5:22 PM on March 21, 2021

clew, that is a frequent point of confusion but effectively no one pays tax on a gift like this. But why ask on the Internet if you have $5 million? With that level of assets a good tax person is going to easily more than pay for themselves, even if they are charging a lot of money annually.
posted by wnissen at 5:25 PM on March 21, 2021 [11 favorites]

You are probably best to talk to a tax accountant in Montana, but one other thing to consider is any penalties they might pay for ending their mortgage early. If you can time it for when it is up for renewal you should avoid those fees. Might be worth finding out when they are due, so they don’t renew for 5 years when you can pay it off next year.
posted by backwards guitar at 5:27 PM on March 21, 2021 [2 favorites]

Best answer: Estate tax and gift tax are connected in US tax law. If you give more than $15,000 in cash or assets in a year to any one person, you need to file a gift tax return. That doesn’t mean you will necessarily have to pay a gift tax, in fact you almost certainly will not. It just means you need to file IRS Form 709 to disclose the gift. The annual exclusion is per recipient; it isn’t the sum total of all your gifts. That means, for example, that you can give $15,000 to your godson and another $15,000 to your godson's wife in the same year without having to file a gift tax return.

In addition to the $15,000 annual exclusion per recipient you get a multi-million dollar lifetime taxable gifts exclusion (which is the same as your estate tax exclusion, and for 2021 is currently $11.7 million). For example, if you give your godson $200,000 this year, you’ll use up your $15,000 annual exclusion to him — so you’ll need to file IRS form 709 with your 2021 taxes, however, you won’t pay a gift tax. The extra $185,000 ($200,000 - $15,000) counts against your $11.7 million lifetime exclusion, but doesn't exceed it. In the unlikely event you exceed the lifetime exclusion you will start paying gift tax. When you die the taxable gifts you gave over your liftetime reduce the maximum amount your estate can transfer to your heirs without paying estate tax. So, for example, if your only gift in excess of $15,000 in your lifetime is a $200,000 gift to your godson, and you die in 2021, your estate will pay estate tax on your assets to the extent that they exceed $11,515,000 ($11.7 million - $185,000).
posted by RichardP at 5:42 PM on March 21, 2021 [12 favorites]

US federal gift tax is not as complicated as people make it out to be.
There are two numbers that matter. The yearly exclusion, and your personal exclusion.

If you go over the yearly exclusion to any one person, you (not the giftee) have to fill out a form and it counts towards your personal exclusion.
If your personal exclusion goes over 11 million or so over your lifetime, you have to pay taxes on anything above that. You don't lose your yearly exclusions.

Most people are covered by the 11 million personal exclusion, in that they will never give away more than 11 million dollars. If you fall into this bucket you have nothing (tax-wise) to worry about giving anyone anything, except that you have to fill out a form and tell the IRS if it's over 15,000.
posted by hermanubis at 5:44 PM on March 21, 2021 [4 favorites]

Paying off a mortgage is a generous but not great idea. As long as they have a low interest rate mortgage, which they probably do, just gifting them money that they can use to max out their various tax sheltered accounts, is probably better in the long run.
posted by Candleman at 6:36 PM on March 21, 2021 [1 favorite]

Response by poster: Again, I am asking about a one-time payoff of the mortagage.

I am not interested in annual gifts.
posted by ITravelMontana at 7:27 PM on March 21, 2021 [2 favorites]

The mortgage company doesn’t care who writes the check, so long as it clears. You can pay it directly. Contact the mortgage company, ask for the current pay-off amount, give them the info for where they can draw the funds from (i.e. bank routing number, debit card number, etc.) and it’s done.
posted by Thorzdad at 7:57 PM on March 21, 2021 [3 favorites]

I am not interested in annual gifts.

Unless your total gifts are multimillion dollars, it doesn't matter how much you give in a single year. The yearly limit, no matter what they spend it on, affects the amount of paperwork needed, not the tax implications (up until the multimillion dollar limit).
posted by Candleman at 8:27 PM on March 21, 2021

Just because I was uncertain enough to look it up after reading the above: everyone above has accurately described the gift tax implications to you. Implicit in that, but not quite explicitly in the thread yet I don’t think, is that the recipient of the gift does not have to treat it as taxable income: from the IRS.

So if you pay off his 200K mortgage, you have to file a gift tax return but you won’t owe any taxes, and he doesn’t file anything or pay anything.
posted by LizardBreath at 7:15 AM on March 23, 2021

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