Tax Guru – Ker$tetter Letter

From a Client:

Subject:  Accounting for Girls’ Inheritance "Forward"

Kerry:

Our plan is to loan our daughter and her husband $140,000. Annual payments will be their annual "gifts".  Their loan will be secured by a mortgage on their land and secured by a note @ zero interest. Their closing is soon.

Problem? Or problems?

My Reply:

You are on the right track here.  I’m assuming you are trying to work with the annual tax free gifting exclusion, which is currently $14,000 per donor (giver) per donee (recipient).

You just need to be sure to call the $140,000 a loan in your books and on your kids’.

Each calendar year, you can forgive $56,000 of principal as gifts from you and your wife to your daughter and to her husband.  A letter explaining this each year would be perfect documentation, as would recording it as such in your personal books.  This assumes there haven’t already been other large gifts that would count towards the $14,000 annual limit.  If so, you can just reduce the debt forgiveness by enough to keep the year’s total at no more than $14,000.

Some other relevant trivia:
The gifting limits are done on a calendar year basis.

You don’t need to wait a full year from the date of the loan to make the first debt forgiveness gift. It just needs to be before midnight on December 31, 2015.  Technically, you can give the second one on January 1, 2016.  However, if you do that, you won’t be able to give any more large gifts for the rest of 2016 and stay under the annual limit.

Every few years, the annual limit is bumped up by $1,000 when the cost of living warrants it.  It was last raised to $14,000 as of 2013.  When it is increased to $15,000 in the next year or two, you can increase your annual gifts accordingly.

I hope this info isn’t too confusing and is useful for your gifting plans.  Let me know if you have any questions.

Kerry

Follow-Up:

Thanks. Perfect advice.