Tax Guru – Ker$tetter Letter

Q:

Subject: Question about gifting

I understand the $12,000 limit for individual gifting, but I have a scenario I would like your opinion.

What if parents want to gift equal amounts of money to their 2 grown children; both are married, but one has 2 children, the other no children? So for Family A (with 2 kids) the maximum gift is $96,000 while for Couple B (no kids) the maximum gift is $48,000. Now can Family A gift Couple B $24,000 so that each child has received $72,000 from the parents without any tax consequences?

A:

You wouldn’t believe how often that kind of re-gifting scheme comes up when people ponder ways in which to “out-smart” the annual tax free gifting limits. 

It’s not allowed and would be considered fraud if IRS were to discover it. A true bona-fide gift can’t have any conditions on it, especially that the money be given to someone else.

If you want to stay under the annual limits, there are a number of ways in which to accomplish the kind of equal distribution that you are desiring.

The simplest is to merely wait until the beginning of the next calendar year, when there is a new $12,000 per donor per donee limit available, and gift the childless couple the additional money.

A common technique used to get the cash into the childless couple’s hands now, without exceeding the limit, is to loan them the extra amount now and then forgive that debt in future years as gifts in those years.

There are also a few types of transfers that aren’t considered gifts subject to these limits.  The most common types are payments for medical and education purposes.  Depending on the circumstances involved here, if the parents were to pay for the childless couple’s college tuition and/or medical care, those amounts can be in addition to the $48,000 of direct cash payments.

As you can see, it can get tricky; so the services of a good professional tax advisor would be advisable.

Good luck.  I hope this helps.

Kerry Kerstetter
 

 
Follow-Up:

Dear Kerry,

Thank you for your answer. Your reply broke the tie. My CPA says the same thing as you did.

My father’s CPA says there is nothing wrong with the “scheme.” He says after you gift the money, the person receiving the money then makes his/her own gift to the 3rd party and he/she is allowed to. But I think that the spirit of the gift limits, and the intentions of the gifting is what is at issue.

Thanks again.