Dear Len & Rosie,
My mother’s trust gives my brother and I unequal amounts. I get 70% and my brother gets only 20%. A grandchild will inherit the remaining. I am my mother’s successor trustee. When she dies, can I give my brother a bigger share without any consequences?
There is one simple rule to remember. As trustee, you can give away your money, but you can’t give away other people’s money. So, you can gift to your brother if you want to, but it has to come out of your share. Your mother’s grandchild must get his or her full share of the trust. Otherwise, you are opening yourself to a lawsuit that you would surely lose.
As for gifting money to your brother, there are a few factors to consider. First, there is an annual Gift Tax deduction of $15,000 per recipient. This means you can give $15,000 to as many people as you want to, each and every year, without consequence.
If you give your brother more than $15,000, then you are required to file a Federal Gift Tax Return (IRS Form 709). However, you won’t have to write out a check to the IRS. The gift tax comes out of your Unified Credit, which pays the Gift and Estate Tax on the first $11,200,000 you give away during your lifetime or pass on after your death. Unless the value of your assets is approaching that amount, you will not have any problems.
Your brother will not have to pay income tax on the gift either. It’s not income. He didn’t earn it. However, there would be income tax due if you give him certain tax deferred assets such as United States Savings Bonds or annuities that he then cashes in after he receives them from you.
There is one twist you should look out for if your mother leaves you a larger portion of her tax-deferred retirement accounts than your brother. When you draw from a tax-deferred retirement account such as an IRA, 401(k) or 403(b), you have to pay the income tax on that money, even if you turn around and give it to your brother.
If your mother is not incapacitated, you may want to talk to her. Maybe she can update her trust and beneficiary designations to leave your brother a larger share. This way, you can avoid the gift tax issue altogether.
A correction: In a recent column we mistated the amount of assets that may pass free of the Federal Estate Tax in 2018. The correct amount is $11,200,000.
Len & Rosie
Dear Len & Rosie,