Q&A: Can My Father-In-Law Give Us a 14k Gift? Can He Give Us More?

Occasionally, we will reprint questions and answers from clients - always with their permission and always edited for confidentiality.

So a client wrote me an email today that is fairly common, especially this time of year, when clients talk to their kids about making gifts, or parents are talking to their children about giving gifts.

The questions went like this:

Hi Marc, hope all is well.

I’m touching base as Monica’s father has graciously offered to help us financially. We are looking to possibly purchase a home while holding onto our current condo for rental income - or at least that's our current working theory.

In essence, my understanding is that Monica’s father wants to maximize the tax benefits of gifts - which are limited to $14k per year right? As such, we have a few questions as we really want to ensure we do this in the best way possible for everyone:

1. How does our daughter Bea fit into this picture? Is Michael, Monica’s father, able to gift the same to her and, if so, what should I open to ensure that it is held in her name (is there a simple bank account for that)?

2. Is it accurate that Michael can bestow $14k to each of the three of us each year, so as to total 42k by 12/31/14 and another $42k on 1/1/15?

3. Is it possible for Michael to send 14k additionally per person to his sister Jennifer, who in turn then sends it along to each of us?

Thank you and all the best to you and your family.

Scott

And my answer:

Scott:

Things are well - busy of course with the kids and work, but very well. Hope everything is good for you guys.

So first, some basics to understand about gifting - there is no actual limit on the amount or the object of your father-in-law's gifts. However, if he gives more than $14,000 cumulatively in one calendar year to one person, he (Michael) is required to file a gift tax return with IRS and tell them he has done so. He does not pay a tax unless he has given away, in his lifetime, more than 5.34M this year, with that limit going up to 5.43M next year, and going up a little more each year.

So if Michael gives Monica 50k in 2014, that means in April of 2015 he files a gift tax return (Form 709) and tells IRS he gave Monica 50k, of which 14k was "free" and which IRS does not track, and the other 36k IRS will keep track of to see if Michael ever goes over the 5.43M exemption, or to add to his gross estate at his death, to see if he goes over the 5.43M exemption at death.

Michael's own estate planner or tax adviser should be advising him on whether these gifts would impact his own estate or gift tax planning.

The receipt of a gift is never income to the recipient, and never a deduction to the donor.

So onto your questions:

1. How does our daughter Bea fit into this picture? Is Michael, Monica’s father, able to gift the same to her and, if so, what should I open to ensure that it is held in her name (is there a simple bank account for that)?

Michael can give the 14k per calendar year to Bea. You can open a separate UTMA account in Bea’s name to deposit it in. There may be other advantages to Michael setting up a 529 plan for Bea’s gift himself.

2. Is it accurate that Michael can bestow $14k to each of the three of us each year, so as to total 42k by 12/31/14 and another $42k on 1/1/15?

Yes. But remember that includes anything he has given any of you over the course of 2014, and if he gives it to you on 1/1/2015, that is all he can give in 2015, without filing the gift tax return form (but probably not paying a tax).

3. Is it possible for Michael to send 14k additionally per person to his sister Jennifer, who in turn then sends it along to each of us?

Well, yes and no.

• Can Michael give 14k to his sister. Yes.
• Can Michael give 42k to his sister? Yes, but then he has to file the gift tax return.
• Can Jennifer give the 14k that Michael gave her Monica? Yes, but Jennifer is not required to do that, and Michael giving money to Jennifer cannot be conditioned on what Jennifer will do with it.
• But no, you cannot have a “giving tree” where Michael gives money to X, Y and Z, on the condition that X, Y and Z give the money to you, Monica and Bea.

Hope this helps.

Marc