LET'S HELP THE KIDS BUY A HOUSE

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

Each year every Donor may make tax free gifts totaling $11,000* to each recipient. Donor gets no income tax deduction, and the recipient pays no income taxes.

* Note: [It used to be $10,000 per year; effective 1/1/2002, it has increased to $11,000.
• This rule applies to US citizens, residents, and non-residents who make US gifts.

A single person (Dad) makes a gift of $15,000 to Daughter for Christmas. The first $11,000 is tax free; the balance is taxable. Assuming that Dad has never made a large gift before, he has a $1,000,000 exemption he may leave at death or give away while alive. Now, making a "taxable gift" of $4,000 (the amount in excess of the tax free $11,000 amount) Dad must file a Gift Tax Return (IRS Form 709) showing consumption a portion of his $1,000,000 exemption. Dad now owes no tax, but he has only a $996,000 exemption left when he dies (or makes future large gifts).

Dad blew it. He should have made a $11,000 gift for Christmas, PLUS a $4,000 gift a week later in the new year. Both would have been tax free. The $11,000 tax free gift limit applies each year. A recent 2001 case makes clear that the check should clear before the year is over, because the gift is NOT "complete" until it clears - Dad could have stopped payment until then!

Dad may give Daughter $11,000 and $4,000 to Son-in-Law, but NOT on the pre-condition that Son-in-Law turns it over to Daughter.

If Dad is married, he and his wife may jointly give $22,000 each year.

In addition to the annual $11,000 gifts, Dad may "direct pay" any medical or tuition expenses. "Direct pay" means that Dad may pay his daughter's dentist, but not reimburse his daughter for her dental bills.
• Medical expenses include health care insurance, but no "double dipping" is allowed: Dad may not pay medical expenses for which daughter is reimbursed by medical coverage.

Any tax owed, if the Donor has fully consumed his exemption, is owed by the Donor.

BUT I WANT TO GIVE MORE.
MY DAUGHTER WANTS TO BUY A HOUSE.
HOW CAN I HELP HER?

Gifts in excess of this amount will consume Dad’s exemption. Assuming that Dad and Wife have given $44,000 already, Dad and his Wife may each give another $1,000,000, without any immediate tax cost. [Of course, later when Dad and his Wife die or make large future gifts, they have already used up all of their exemption.]

Loans are not gifts and do not count toward the annual gift rules.

Next year, Dad and Wife cancel $44,000 of the remaining loan; the third year they cancel the rest.

Of course, Dad and Wife can lend the whole $500,000. Each year, Dad and his Wife cancel $44,000 of the loan to Daughter and her Husband.

Actually, rather than canceling the loan each year, I prefer to have checks written each year. Dad and Wife write a check (put "gift" on the check memo line); Daughter and Husband can then write checks back (put "principal pay-down" on the check memo line).

I prefer using separate checks as shown above to create a clean paper trail for tax purposes.

Daughter must make monthly mortgage payments at the proper IRS mandated interest rateon the debt to prove that it is a real loan from her parents, not a gift.

Dad and Wife have already given Daughter the tax free amount for this year.

Dad and Wife and Daughter and Husband sign a Co-Ownership Agreement. Dad and Wife put up all the cash to buy 20% for cash; Daughter and Husband will buy 80% (with financing) and be 100% responsible for all mortgage payments.

Next year, Dad and Wife sign over to Daughter and Husband 8%. [Assuming values are stable, the value of Dad and Wife’s 20% share = $100,000; $40,000 = 8%.]

A couple of years later, Dad and Wife have signed it all away.

Assume Dad is single. He has $1,100,000.

1. If Dad dies, the tax is $48,000. Daughter gets $1,052,000 after tax. [The rate starts at 48% on the excess over $1,000,000.]

2. If Dad gives it all away while alive (OK, it’s a dumb idea to impoverish yourself, but this is to illustrate how the tax law works), the tax is owed by Dad, so he cannot give it all away - he has to keep enough to pay the tax. [Assume he has previously gifted $11,000 to daughter.] He can give away $1,067,000. Tax on the $67,000 is about $33,000.

• With a lifetime gift, Daughter gets $1,067,000; wait until death and Daughter gets $13,000 less.

For more information on gifting, see:
Advanced Estate Planning
Family Limited Partnerships