Inheritance and gifting
August 19, 2007 3:56 PM   Subscribe

How do I handle inheritance by proxy? It will actually be a gift from a parent out of the inheritance from a grandparent.

My paternal grandmother is in her late 80's and things are starting to go wrong with her health. My grandfather died 15 years ago. They were great savers and investors and last year she sold their little paid off home for a half-mil. So the estate is sizable but not gigantic (and will be assuming she doesn't have to use it for extended assisted living care).

So my dad calls me up and in the course of discussing her condition tells me that he'll be getting 6-figures from the estate and intends to give me a small chunk of that. This money will essentially be a gift to me from my dad, not inheritance from my grandmother. I can't really have my grandmother leave me the money directly; while we're not exactly estranged we're not exactly close, either (a disagreement on religion). I will be seeing her next month but I'm not about to start talking about her will.

So let's say my dad will be giving me 30k or so. I know there are tax implications for any gift over $10-12k. What is the best way to handle this? I'd really like to get this money because it will make me debt free except for my house, something I've been working towards for years.

1. Should I have my dad hang onto it and invest it to add to my inheritance from him? I'd rather be debt free now.

2. Should I have him put the bulk of it in an ING savings account dole it out to me annually? I could stand to be debt free in three years.

3. Do I have him "loan" it to me and just not pay it back? I figure this one is legally dangerous. If I did that, what happens when he passes? Do I owe his estate or can I have him specify that they loan is forgiven upon his death?

Any feedback is welcome unless you want to comment on how emotionally cold this all seems. Spare me those comments. I had enough of an emotional rollercoaster when my maternal grandmother died last May.
posted by anonymous to Work & Money (13 answers total)
11K is what you can now get as a gift from a parent, yearly. If it were me and I was looking for an airtight way to do this easily, I'd say split it up into three yearly preditable payments of 11K. Knowing you'll be debt free in three years seems pretty decent esp not worrying about the IRS breathing down your neck. Option number three is fairly feasible but not technically kosher. You could get a loan that you had 11K of forgiven per year. If he dies, someone would really have to be pretty bloodhoundish to go after 20K if he's already got 500+K in the bank. While I would not advise going this direction -- and I am no one's accountant or money advisor, natch -- my guess is it would not bite you in the ass either.
posted by jessamyn at 4:09 PM on August 19, 2007

there are tax implications for any gift over $10-12k

That's only annually, as I think you already understand. But this means your dad can loan you the money and can forgive a certain amount of the loan every year. The limit is $12,000 now, but your dad may want to reserve a small part of that so that he can still give you regular gifts for a holiday or birthday.

Remember though: "If you lend money to a relative or friend with the understanding that it may not be repaid, it is considered a gift and not a loan" (Pub 550) And "if you make an interest-free or reduced-interest loan, you may be making a gift" (Pub 950). So make sure the loan is for a fair amount of interest. Technically this means you won't be debt free that much sooner than you would have been owing the debt to someone else. But it seems a lot better.
posted by grouse at 4:23 PM on August 19, 2007

Of course, if you transfer your debt to your dad, you can get a much lower interest rate, and it the debt won't show up on your credit report.
posted by delmoi at 4:36 PM on August 19, 2007

First, the tax implications are for him, not for you. You would only be liable if he didn't pay the IRS any gift tax and then the IRS couldn't find him. (Unlikely.) So you shouldn't be worrying about the gift tax in the first place, it's his problem. Second, gifts over the annual exclusion only have to be reported to the IRS (again, by him, not by you), no gift tax is due unless total lifetime gifts given by him reach some large amount (see pub 950, linked above, for details).
posted by pamccf at 4:49 PM on August 19, 2007

Take the money sooner instead of later. Since 1/1/06, the gift tax exclusion has been $12,000 per giver -- yourmother and father can each give you that amount (in case that's relevant in your situation).

This money is a gift to you, not an inheritance. Keep it simple and convenient for the giver. "Wow, Dad, that's so great of you. Do you mind spreading it out over x amount of time to take advantage of the gift tax exclusion?" Don't ask him for interest that will be earned on that money in future months. Just take the 30,000 without requesting that he set up a special account or do any paperwork. If he offers, that's even better. But try not to think of the 30 grand as anything other than a generous gift.

(Deleted a bunch of stuff that grouse said much better.)
posted by wryly at 4:59 PM on August 19, 2007

The gift tax exclusion is now $12,000 annually per person. Your father and mother's combined exclusion is $24,000 so your father can write you a $24,000 check tax free. It is irrelevant that the source of the money is inherited by your father. The $24K is a gift from both your parents. He can give the balance to you next year.
posted by JackFlash at 5:12 PM on August 19, 2007

Good point, JackFlash, if the anonymous's father is married. The giver should consider that "If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion."
posted by grouse at 5:19 PM on August 19, 2007

Right, grouse, or they could just write separate checks. If they are both no more than $12,000, they don't need to file a form.
posted by JackFlash at 5:33 PM on August 19, 2007

Let's be simpler about this:

Is your dad rich? Is he likely to give you (or others) over a million dollars while he is alive, or to leave an estate worth more than $3.5 million?

If the answer is yes, stop talking to us and go talk to your dad's financial advisors.

If the answer is no, nobody owes any tax on it, so stop worrying about it. Your dad will have to file form 709, the gift tax form, which will boil down to "I gave my kid $30K, but I ain't never given any big gifts before. So I don't owe shit to nobody. Suck it, feds."

If you wanted to be a real mensch, you could even fill out the form yourself and mail it to your dad to sign.
posted by ROU_Xenophobe at 6:49 PM on August 19, 2007

ROU_Xenophobe: If the answer is no, nobody owes any tax on it, so stop worrying about it.

I think this is being just a little bit too cavalier. With the unpredictable estate tax laws and the rise in real estate prices, it is quite easy to exceed the unified credit limit. If you exceed the $12,000 exclusion limit and use the unified credit, you have to maintain those records for the rest of your life. No need to make things complicated when you can avoid all of that by gifting over two years.
posted by JackFlash at 7:15 PM on August 19, 2007

Grouse has it exactly right. It's a personal loan with the lowest rate that can still legally be considered a loan. While technically there is interest, paying interest to your father is better than paying it to who ever you currently owe. Your father reduces the balance of the loan by $12k every year until what he gives you is gone. If you are married or have kids he can gift them as well. My siblings and I have done this with our parents in many states.

IANACPA/CFP, and ROU is correct that there is a lifetime gift tax exemption of $1M. Perhaps there is an argument that it's no big deal just to directly gift the $30k to you, but now your fathers tax free lifetime gifting ability has been reduced by almost 3%. Many (most) things I have read encourage people to take advantage of the annual $12k exemption as there is no limit on the number of years or people you can gift in this manner.
posted by ill3 at 7:18 PM on August 19, 2007

No need to make things complicated when you can avoid all of that by gifting over two years.

To me, actually changing from what you want to do seems far more complicated than filling out a fuck-off form once and putting a copy with his life insurance so you remember it when he dies.

now your fathers tax free lifetime gifting ability has been reduced by almost 3%

No, by 0.6%, unless anonydad is unmarried. Each parent has 12k, so only 6K goes against the exemption (if it's $30K). And unless he's planning to give away more than a million dollars, who gives a shit how much more money that he doesn't have and never had he could have given away if he'd had it, which he didn't?

Can anonydad give anonymous a nice chunk of change? Yes.
Will anonymous owe tax on it? No.
Will anonydad or his estate owe tax on it, ever? Not unless he is rich.
Will anonydad have to fill out a form saying he doesn't owe tax? Yes.
posted by ROU_Xenophobe at 8:23 PM on August 19, 2007

Add to all of this: if the OP is also married, the total that can be given, tax-free, per year from the father and his wife to the son and his wife is $48,000.
posted by yclipse at 3:55 AM on August 20, 2007

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