Annual Gift workaround

[MT and SC]

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

 

[army judge]

Any advice?

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".

 

[Tax Counsel]

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.

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.

 

[Zigner]

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.

 

[Foamback]

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.

 

[Tax Counsel]

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.

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.

 

[Tax Counsel]

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.

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.

 

[MT and SC]

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.

 

[Foamback]

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.

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

 

[Tax Counsel]

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

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.

 

[Foamback]

Washington is $2.2M exemption, and the CPA and broker ran the numbers and had her gift her house and her MSFT dating to 1986

 

[chrd]

I'm in a very large income inheritance scenario and honestly wish I'd be able to give more away to lower my taxable amount that went to family instead of a charity. Already have done the retirement accounts, etc.

If you're married I think it's $36,000? Also deposits over $10,000 are going to be reported for the receiver even if there's no tax implication so the IRS will be notified in some regard I think anyway. I'm not a lawyer but that was my guess when I was thinking the same thing.

It got me thinking about joint brokerage accounts or even bank accounts that had multiple owners. I had one with my Mom and sister and if we were supposed to keep a good track of what belonged to who then we did a terrible job of it unknowingly. I don't know the rules around putting into a brokerage and a) is that cash now both of your cash? or b) can you make an investment and later sell it a week, month, etc for a profit/loss... how's that equity classified? Tax on the gains maybe but the base is now fair game for anyone?

Just thinking creatively and this is not advice at all.

 

[Zigner]

I'm in a very large income inheritance scenario and honestly wish I'd be able to give more away to lower my taxable amount that went to family instead of a charity. Already have done the retirement accounts, etc.

If you're married I think it's $36,000? Also deposits over $10,000 are going to be reported for the receiver even if there's no tax implication so the IRS will be notified in some regard I think anyway. I'm not a lawyer but that was my guess when I was thinking the same thing.

It got me thinking about joint brokerage accounts or even bank accounts that had multiple owners. I had one with my Mom and sister and if we were supposed to keep a good track of what belonged to who then we did a terrible job of it unknowingly. I don't know the rules around putting into a brokerage and a) is that cash now both of your cash? or b) can you make an investment and later sell it a week, month, etc for a profit/loss... how's that equity classified? Tax on the gains maybe but the base is now fair game for anyone?

Just thinking creatively and this is not advice at all.

Please start your own thread. Keep in mind that, if this is related to one of your prior threads, it may be more appropriate to include it there.

 

[Tax Counsel]

As far as gift tax for 2024 goes, you must file the gift tax return (Form 709) if you give gifts over the year that total $18,000 to any one person. Thus you may give out gifts to as many people as you want of, say, $17,000 and those gifts do not need to be reported on the gift tax return. Gifts that total $18,000 or more to any one person will result in a taxable gift for the portion of the gifts that exceed $18,000. Taxable gifts first reduce your lifetime unified credit against gift and estate tax, which in 2024 stands at $13,610,000. There is no actual gift or estate tax to pay until the unified credit is used up. So for the vast majority of Americans, giving gifts over the $18,000 annual exemption only results in filing the Form 709 but paying no tax. The taxable gift reduces your lifetime unified credit. Whatever you don't use up of that credit during your lifetime is available to your estate to use against federal estate tax. If the law remains the same after next year most Americans don't really have a need to plan around gift and estate tax problems unless they expect they'll give away in gifts that between the lifetime taxable gifts and the amount of gifts made by their estate exceeds the lifetime unified credit.

Married couples may either file separate gift tax returns if they both made taxable gifts, or, if only one spouse did, they can elect to split the gifts which will raise the annual gift tax exclusion to $36,000 for the one spouse required to file a return.

The tax act passed by congress that greatly expanded the both annual gift tax exclusion and the lifetime unified credit will expire at the end of next year. Unless Congress acts to change the repeal, both the exclusion and the credit will drop substantially. If you expect to have more than about $2 million that may be available to your estate you really should see a tax attorney or other tax professional who is very knowledgeable about gift and estate taxes for some tax planning to make sure you don't get caught in a bad tax trap after 2025.

 

[Foamback]

You may want to double check your post. It's pretty confusing

"Gifts that total $18,000 or more to any one person will result in a taxable gift for the portion of the gifts that exceed $18,000. Taxable gifts first reduce your lifetime unified credit against gift and estate tax, which in 2024 stands at $13,610,000. There is no actual gift or estate tax to pay until the unified credit is used up. So for the vast majority of Americans, giving gifts over the $18,000 annual exemption only results in filing the Form 709 but paying no tax."

 

[Zigner]

You may want to double check your post. It's pretty confusing

"Gifts that total $18,000 or more to any one person will result in a taxable gift for the portion of the gifts that exceed $18,000. Taxable gifts first reduce your lifetime unified credit against gift and estate tax, which in 2024 stands at $13,610,000. There is no actual gift or estate tax to pay until the unified credit is used up. So for the vast majority of Americans, giving gifts over the $18,000 annual exemption only results in filing the Form 709 but paying no tax."

It's really not.

The gift is taxable if it causes you to exceed the lifetime unified credit.

In other words, If it's over $18,000, then you have to report it. Whether tax must be paid on it depends on your individual circumstances.

 

[Tax Counsel]

You may want to double check your post. It's pretty confusing

"Gifts that total $18,000 or more to any one person will result in a taxable gift for the portion of the gifts that exceed $18,000. Taxable gifts first reduce your lifetime unified credit against gift and estate tax, which in 2024 stands at $13,610,000. There is no actual gift or estate tax to pay until the unified credit is used up. So for the vast majority of Americans, giving gifts over the $18,000 annual exemption only results in filing the Form 709 but paying no tax."

The way I described is how the tax law & regulations express it, though written in the language of tax law. Unfortunately there's not a no easy way to write it any simpler that would be accurate withhout a lot longer explanations. But an example may help.

The first sentence means that if the total of gifts that Amy gave Barry in 2024 was $25,000 then Barry has made taxable gifts to Barry of $7,000 ($25,000-$18,000=$7,000). If Amy makes a gifts in 2024 to Carrie that total over $30,000, then she has made taxable gifts to Carrie of $12,000 ($30,000 - $18,000= $12,000). She must file a gift tax return once her gifts to any single person add up to $18,000 or more. Both these gifts trigger that filing requirement. If she doesn't make gifts to anyone else during the year that total $18,000 or more, then her total taxable gifts are $7,000 from the taxable gift to Barry + 12,000 taxable gift to Carrie $12,000= $19,000.

The second sentence means she reports that as her taxable gifts in 2024 on her federal gift tax return (Form 709) return filed next April. As part of that, she reduces her lifetime credit againt estate and gift tax ($13,610,00, assuming this was the first year she made taxable gifts) by $19,000. That then leaves her with a unified credit left of $13,591.00.

The the third sentence says she doesn't actually pay gift or estate tax until she uses up the unified credit. In my example Amy still has a lot of unified credit left, so she doesn't pay any gift tax this year. She can make more taxable gifts next year if she wants and still pay no gift tax until that $13,591,000 is used (though it goes up a bit every year for inflation).

But she needs to be mindful that (1) every taxable gift she makes reduces the credit her estate will have too, leaving less credit to use on the estate tax return after she dies and (2) as things stand now, the lifetime unified credit is set to go way down after 2025 unless Congress acts next year to prevent the sunset of the law that boosted that credit. Right now we have no idea what Congress may do because we don't know who will be president and which party will control the House and Senate.