Annual Gift workaround

M

MT and SC

New Member
Jurisdiction
Montana
Regarding annual gifts to individuals, I know the maximum annual gift in 2024 will be $18,000 for each person you give to before you have to pay a gift tax on anything over that $18,000 or come to terms with the fact that whatever goes over $18,000 will be taking off your estate tax cap.

My question is: is it legal for you to give someone else $18,000, such as another family member, and then have them turn right around and gift that $18,000 to the person you originally wanted to have the money and essentially be able to stack that on top of your own $18,000 a year gift? This would give the target a family member $36,000 instead of just $18,000 gift tax free. This seems a bit shady but I can't find anything on the Internet that says you can't do it, provided you have a willing party to do it.

Any advice?

Thanks
 
MT and SC said:
Any advice?
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Don't try to create a scheme to beat Uncle Sammy's IRS.

Obey Uncle Sammy's laws, don't try to cheat him or his agents.

Sure, you might get away with it once or twice, but eventually Uncle Sammy's spooks, spies, secret police, and other law enforcement personnel will discover your misdeeds. Once that happens, you'll have "hell to pay".
 
MT and SC said:
My question is: is it legal for you to give someone else $18,000, such as another family member, and then have them turn right around and gift that $18,000 to the person you originally wanted to have the money and essentially be able to stack that on top of your own $18,000 a year gift? This would give the target a family member $36,000 instead of just $18,000 gift tax free. This seems a bit shady but I can't find anything on the Internet that says you can't do it, provided you have a willing party to do it.
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Your plan to give $18,000 to person A with the understanding that person A will then give it to Person B doesn't work. The tax law treats that as though you made a direct gift of $18,000 to Person B with the result that you will have made a total of $36,000 of gifts to Person B if all those gifts occur in the same year (the $18k you made directly to B plus the $18k you gave B indirectly through A) . You'd then have to file a Form 709 gift tax return and reduce your lifetime unified credit against estate and gift taxes by the amount you gave Person A that exceed that years gift tax exclusion amount. As you noted, the gift tax exclusion in 2024 is $18,000. So for 2024 the amount of gifts you propose to make to Person B under your plan would result in a taxable gift of $18,000.

Taxable gifts first reduce your unified credit, in this case that means reducing the unified credit by $18,000. Only once you've used up your entire lifetime unified credit would you actually have to pay gift tax. The unified credit in 2024 is $13,610,000. Any amount of the credit you don't use up during your lifetime your estate will get to use to cover the federal estate tax.

If you have, or expect to have, a large enough estate that the federal estate tax may be an issue then you really need to see an estate planning attorney or tax attorney. The attorney can craft plans that will accomplish your goals while costing you and your estate the least amount in taxes that are legally permitted. There are a variety of ways that you can that and one of them might work well for what you want to do.

The extra tax and penalties that you and your estate end up paying if you get it wrong can be very expensive. This is not something you want to do with tax plans pitched you by people on the internet that you don't know.
 
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Bingo.

People misunderstand what the $18,000 limit really is. It is just a reporting threashold of little to no tax consequence except for the few.
 
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Zigner said:
If this person had enough to be concerned about exceeding the unified credit, then this person wouldn't be on this forum asking this question.
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If you think that then you'd be surprised what some people with money do. You may be giving the person too much credit for being prudent with the wealth he/she has. Just because a person has a lot of money doesn't mean they know squat about what to do with it or how to handle it. Especially if the person got the money in a windfall (e.g. inheritance, lottery, gambling winnings, etc) and was used to asking questions of others on forums like this before that windfall landed on his/her lap, they may still go on the internet to ask questions because that's what they are used to doing. I've seen a few people in that kind of position in my many years of working tax issues and I am no longer very surprised at how poorly people who receive sudden wealth handle the money. It happens more frequently than the general public realizes. The person with the sudden windfall go on the internet or ask their best buds, get bad advice, and blow it all fairly quickly on stupid stuff. It is not all that uncommon for those folks to be broke again in a few years because they knew nothing about money management.
 
Foamback said:
Bingo.

People misunderstand what the $18,000 limit really is. It is just a reporting threashold of little to no tax consequence except for the few.
Click to expand...

It may matter more than you think. If you don't do a good job with completing the gift tax return with the right information that can screw you later even though right now you think you'll never have to worry about actually paying federal gift and estate taxes.

Consider, for example, that you unexpectedly win the lottery, win big at the casino, or get a large inheritance. Then all of the sudden you do have enough wealth where those taxes would be a concern. In that case if you failed to file the gift tax when you should have or were sloppy in filling it out, it could you or your estate to pay more tax than you otherwise would. And that includes affecting your income tax returns, since the valuations put on those returns will be where the IRS starts should it decide to audit the income tax returns of the donee or the donor. If what's on the income return conflicts with information on the gift tax return, the taxpayer may have a significant problem.

There is also the issue that the tax law may change. Should the Democrats win the House, and keep the Senate and the White House, they will likely resurrect plans to broaden the estate and gift taxes. One of the main proposals for that is to repeal the huge increases in the estate tax exemption that have been made over the last 20 years. That could reset the unfied credit back down to as low as $1 million. Should that occur, a much larger group of people will need to be concerned about estate and gift taxes, and if they didn't take seriously the requirement to file an accurate gift tax return before that change is made they may find themselves stuck with unfavorable valuations taken on the gift tax returns that then the IRS auditor uses to the advantage of the IRS on an income tax audit.

For that reason, I encourage my clients to still be smart about how they give the gifts they want to make even if today it looks like they won't have to worry about actually paying estate and gift taxes. No one can predict the future with perfect accuracy and I help my clients work out plans that will be tax efficient whether or not they ever end up subject to those taxes. There are usually several different ways to achieve the same gift, but how it is done may significantly change how much tax ends up getting paid should they find themselves subject to estate and gift taxes later on.
 
Thanks for everyone's thoughtful replies. This is an interesting family dynamic now that a large inheritance largely goes to one person and others were nearly cut out with a lot of hurt feelings, although it was not unexpected. I know about investing (indexing vs active management), but estate planning is a whole other issue that is new to me. I am trying to educate myself before hiring anyone for the family for estate planning purposes and be armed with education. Now that the estate tax cap might get cut in half after 2025 or less depending on the makeup of Congress when the current law is supposed to sunset, we need to know our options as time might be running out as to what to do.
 
Tax Counsel said:
It may matter more than you think. If you don't do a good job with completing the gift tax return with the right information that can screw you later even though right now you think you'll never have to worry about actually paying federal gift and estate taxes.

Consider, for example, that you unexpectedly win the lottery, win big at the casino, or get a large inheritance. Then all of the sudden you do have enough wealth where those taxes would be a concern. In that case if you failed to file the gift tax when you should have or were sloppy in filling it out, it could you or your estate to pay more tax than you otherwise would. And that includes affecting your income tax returns, since the valuations put on those returns will be where the IRS starts should it decide to audit the income tax returns of the donee or the donor. If what's on the income return conflicts with information on the gift tax return, the taxpayer may have a significant problem.

There is also the issue that the tax law may change. Should the Democrats win the House, and keep the Senate and the White House, they will likely resurrect plans to broaden the estate and gift taxes. One of the main proposals for that is to repeal the huge increases in the estate tax exemption that have been made over the last 20 years. That could reset the unfied credit back down to as low as $1 million. Should that occur, a much larger group of people will need to be concerned about estate and gift taxes, and if they didn't take seriously the requirement to file an accurate gift tax return before that change is made they may find themselves stuck with unfavorable valuations taken on the gift tax returns that then the IRS auditor uses to the advantage of the IRS on an income tax audit.

For that reason, I encourage my clients to still be smart about how they give the gifts they want to make even if today it looks like they won't have to worry about actually paying estate and gift taxes. No one can predict the future with perfect accuracy and I help my clients work out plans that will be tax efficient whether or not they ever end up subject to those taxes. There are usually several different ways to achieve the same gift, but how it is done may significantly change how much tax ends up getting paid should they find themselves subject to estate and gift taxes later on.
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And of course you are right about all of that.

What I was trying to say is that the $18K is a just reporting limit and doesn't affect the receivers annual income tax.

Federally, the tax burden is on the estate or giftor, and only when the lifetime limit is reached.

Some states like washington don't have a gift tax but do in fact have a estate tax, so it's common to gift assets prior to passing
 
Foamback said:
Some states like washington don't have a gift tax but do in fact have a estate tax, so it's common to gift assets prior to passing
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Very few states have a gift tax. You can probably count them on one hand.

Many states in the last decade have repealed their estate tax because the federal government took away the state death tax credit for the federal estate return that effectively resulted in the federal government paying the state tax — the combined tax of the estate did not go up when the state designed their estate tax in the right way. So voters were happy, the state was getting more revenue and was happy, but the federal government was not happy. So Congress repealed that credit and took away that advantage of state estate taxes. As a result a lot of states that used that set up have repealed their estate tax because now it would increase what the estate pays in taxes, and voters tend not to like that. Other states conformed their estate tax with the federal estate tax, meaning the tax only applies to large estates.

There are still a number of states that use an inheritance tax, though. Whether it's worth losing the step up in basis the estate gets in property when the owner dies to avoid paying inheritance taxes will depend on how much of each tax would be paid. In a lot of cases it is simply better to hold on to the asset and get the basis reset to fair market value rather than making a gift of the asset while still alive to save on inheritance tax.
 

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