Couple of gift tax questions

Factual Questions
1

Let’s say you have a friend who is dying and will not see the end of the year. He has no children, no spouse/ex-spouse or any other family, and really no assets. He lives in a rented apartment and drives an eleven year old car. But he does have about $1 million in the bank from years of saving and investing. He wants to give it to you so he can see you enjoy it while he is still alive.

Say he does this and doesn’t file a 709 and then dies. Who does the IRS collect the gift tax from?

Say he “loans” you the money and then dies, leaving you nobody to pay it back to. Does this then become income that you owe tax on?

Say he gives you the million in cash and you keep it in a safe rather than put it in the bank, ergo no paper trail or gift tax filed. Is this a form of tax evasion and if so, who is guilty, him or you?

2

The first thing is that there probably isn’t any gift tax due . A gift tax return is supposed to be filed because the gift is over the yearly exemption amount , but unless your friend made other large gifts , it won’t exceed the lifetime exemption ( which is around 10 or 11 million)

3

As previously said: Even if he does file form 709, there is no federal tax on the first few million of gifts/estate tax, so this question is moot. This assumes the money is in a bank. If it is appreciated stock, there would be capital gains taxes to pay if it were sold before (but not after) he dies.

If you “borrow” the money, you would owe it to his estate. After debts/taxes are paid, it would then flow back to you as the sole beneficiary.

Taxes are never levied on the receiver of gifts unless… If the estate were large enough to trigger a tax, the IRS could presumably claw back the funds from you because it was a sham transaction. Then, they would take out the tax and penalties ad give the remainder back to you.

In the last case, if you did hide the money in a safe, you would be considered a co-conspirator in a tax-evasive scheme if there were indeed taxes being evaded. As I said in the first paragraph, there is not federal tax on one million. My state’s estate tax starts at one million, so there may not be any state gift/estate taxes either.

4

There isn’t nobody to pay it back to. If he has loaned you money, then after he dies you owe a debt to his estate.

If tax is owed and nobody is paying it, then yes, tax evasion is happening. According to the IRS, the donor is generally responsible for paying the gift tax.

If you have an undocumented $1M in cash that the IRS somehow becomes aware of, I suspect you might have a hard time convincing them that it was a gift from a deceased person and that you therefore owe no tax on it. I’d guess they might treat it as a “treasure trove”, which means it’d be subject to ordinary income taxation.

5

I guess I’m confused about the exclusions rules.

Are you saying that I could give each of my 3 kids 100K this year and not pay gift tax but it would dig into the lifetime limit, but if I gave them each 10K it would not be taxable and not affect the lifetime limit. Do I have that correct?

6

PK, I know we’ve had our differences. But please tell me it’s not you who is sick and won’t last the year!?!

7

From here:

Most taxpayers won’t ever pay gift tax because the IRS allows you to gift up to $12.06 million over your lifetime without having to pay gift tax. This is the lifetime gift tax exemption, and it’s up from $11.7 million in 2021.

So let’s say that in 2021 you gift $216,000 to your friend. This gift is $200,000 over the annual gift exclusion. That means you will need to report it to the IRS. However, you won’t immediately have to pay tax on that gift. Instead, the IRS deducts that $200,000 from your lifetime gift tax exemption. Assuming you have never made any other gifts over the annual exemption, your remaining lifetime exemption is now $11.86 million ($12.06 million minus $200,000).

…one way to prevent taxation of any assets you pass on is to gift those assets in increments of $16,000 or less. This could take some planning on your part but it is completely legal.

Reading further there, the estate tax and gift tax are linked: the estate tax exclusion is $12.06M or the remainder of your lifetime gift tax exemption, whichever is less. So if you have an estate worth well over $12.06M, and you want your heirs to receive as much of your wealth as possible, then the winning strategy is to give them annual gifts right up to the annual exclusion limit so they don’t weigh against the lifetime exclusion. If you start early enough so that your remaining estate is whittled down to less than $12.06M by the time you die, then your estate won’t be taxed.

If you’re married, the IRS says you and your spouse are each entitled to the annual exclusion. So you and your spouse together could give $32,000 to any one person in any one tax year, and it wouldn’t weigh against the lifetime exclusion. A follow-up question is whether you and your spouse could give $32K to your child, and then also give $32K to your child’s spouse, and have all of it subject to the annual exclusion. I suspect so, but the IRS doesn’t explicitly say that at that link. If true, it would mean you and your spouse could give $64K to another couple each tax year without incurring any tax.

As the first link notes, most people don’t ever accumulate or give away enough money to trigger a gift tax or estate tax, so unless you’re really wealthy, this is all academic (as long as you file the proper IRS paperwork when you give more than $16K to any individual in any single year).

8

No. I’m not even involved.

In addition to being a LEO I own a business and have both an accountant and an attorney. A guy at work asked me to ask one of them these questions. But I don’t pay my accountant or my lawyer to answer other peoples questions so I came here.

9

In the real world there could be many complications aside from the tax issues. The person may need the money for upcoming healthcare or hospice expenses. Serious health problems sometimes go away or become less severe. The person may actually make it to the end of the year, and even be around for many more years. In a situation like this, it might be better to come up with a use for the money where both people can benefit.

For example, the person can buy a nice house and file a Transfer On Death Deed for the friend. A TODD is a document which transfers ownership of the property after the person dies. The friend can live in the house for free. This way the person can enjoy seeing his friend living in the nice house, but the asset is still his while he is alive. Or buy a lake house with a boat and invite people to hang out on the weekends. Something like that allows him to see the enjoyment of the money, but he still has the value if he needs it.

The IRS-specific answers are useful for a theoretical discussion, but I would think the real world situation of a person with a terminal illness will have a lot more to discuss than how to deal with taxes. And it may be me, but I get strange sense that this person may be thinking about taking control of when his end is. If so, that’s something which comes with a lot of moral issues for the recipient of the money. (This is just my wild feeling. Not saying it’s actually what’s going on.)