Tax Consequences for "gifting" money

Dear Len & Rosie,

My sister is renovating some space in her house so that our elderly father can live with her. We siblings want to give her money to help pay the cost of these renovations. How do we do this so that she does not have to pay income tax?  Would these funds, maybe $65,000 altogether, be considered a gift to her?

Sandy

Dear Sandy,

It’s refreshing to read about family members cooperating and helping one another in such a manner. We usually learn of arrangements such as yours only after problems occur.

Your situation is fairly straightforward. Your sister will not have to pay income tax on the money gifted to her from you and your other siblings. Gifts are received, not earned, so gifts are not subject to income tax, except for tax-deferred assets, such as a United States Savings Bond, and in that case the tax isn’t due until the Savings Bond is cashed in.

You may give your sister as much money as you wish and she won’t have to pay any income tax. However, if you give her more than $15,000 during any one year, you will have to file a gift tax return, IRS Form 709, with the income tax return you’ll have to file by next April 15th. The amount you give her above $15,000 is subject to federal gift tax. You won’t have to pay any gift tax now, but the amount of the gift in excess of $15,000 will reduce the amount of your assets that avoid the Federal Estate Tax (the death tax) when you die. However, in 2019, up to $11,400,000 will pass free of the estate tax on your death, well, you should have those problems.

There are even ways of getting around this. You may gift your sister $15,000. So may your spouse if you are married. Each of your other siblings and their spouses may gift up to $15,000 to your sister without causing any tax liability or the need to file a gift tax return. It should be easy to break the gifts apart into small enough pieces to avoid any gift tax issues.

Just make sure that you do not wind up in a situation that may break your family apart. It is clear to us that your purpose in giving your sister this money is to keep your father out of an impersonal care facility. It’s important for you to understand that your sister has a limit as to what help she can provide her father, even if she doesn’t acknowledge this now. What will you do if she reaches her limit and your father has to be transferred to a nursing home? Will you be angry that your sister has a new addition that you paid for? Will you demand your money back? It’s best to resolve these potential problems now before they become problems.

Len & Rosie

it’s very important to have an estate plan when you are in a blended family

Dear Len & Rosie,

My father passed away in December without a will. He had been married to his second wife for almost seven years. The house he was living in belonged to his wife long before they married but he did have a retirement account, and some other small assets. What happens to his assets now? Does everything go to his wife or are his three adult children entitled to anything? His wife has always been very nice, but this is an awkward subject and none of his children want to cause a problem.

Wendy

Dear Wendy,

Anything your father held in joint tenancy with others will pass to the surviving joint tenants. Any accounts with pay-on-death beneficiaries, such as your father’s life insurance (if any) and his retirement accounts, shall avoid probate altogether and will go to those beneficiaries your father designated. Given that it was a second marriage, there’s a fairly good chance that your father may have kept his children on as designated beneficiaries.

If your father owned any assets in his name alone, without joint tenants or pay-on-death beneficiaries, then those assets are in your father’s probate estate. Because your father had no will, his probate estate will pass by intestate succession, the law about who gets what when someone dies without a will. Any community property he owned will pass to his wife.

If your father had only one child, his wife and child would divide his separate property equally between them. But since your father had three children, his wife inherits one-third of the separate property and you and your siblings will divide the remaining two-thirds of the separate property among them.

There may be problems. There could be a dispute between you, your siblings and your stepmother  over what assets in the estate are community property going 100% to her, and what assets are separate property shared by all four of you. If your father was already retired when he married your stepmother, then his estate should be entirely separate property, but if he was still employed, there is going to be some community property and some separate property. It can turn into a mess.

The sticking point may be your father’s personal possessions, because they have no title. It wouldn’t be so nice to take away your step-mother’s dining room set, even if you want it to stay in the family. What you should do is to talk to her about those items of your father’s that you would like to keep for yourself, and try to work it out. Just remember that she was married to your father and has her own personal interest in any items of sentimental value.

As a rule, it’s very important to have an estate plan when you are in a blended family in which either or both spouses may have children from prior relationships. Your father didn’t bother. Hopefully this won’t cause you problems.

Len & Rosie