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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Capital Gains and Losses
Satisfied Customers: 263
Experience:  Over 20 Years experience in resolving tough tax cases
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I would like to distribute large amounts of money to family

Customer Question

I would like to distribute large amounts of money to family members but dont want to incur gift tax. Would you advise that I set the funds up in irrevockable trusts for them? Or what method would you use to distribute the funds to the 18 family members?
Submitted: 1 year ago.
Category: Capital Gains and Losses
Expert:  Mark Taylor replied 1 year ago.

Hi, my name is Mark. I would be happy to help you with your questions.

Expert:  Mark Taylor replied 1 year ago.

You mentioned that you wanted to distribution a large amount of money to family members and did not want to incur any gift taxes. Approximately how much money are you referring to?

Customer: replied 1 year ago.
400,000
Expert:  Mark Taylor replied 1 year ago.

Ok. You are able to give each family member $14,000 without requiring a gift tax return. If you spread out the payments over two years there would be no filing requirement. So assume that you gave each family member $14,000 now and in January you could give each family member another $14,000.

Expert:  Mark Taylor replied 1 year ago.

If you go over the $14,000. If you give an amount above the $14,000 to an individual, then you would need to complete a gift tax return.

Customer: replied 1 year ago.
I am aware of the gift tax rules but I am talking about $400K per family member.
Expert:  Mark Taylor replied 1 year ago.

Ok, I am sorry I thought that the $400,000 was the total distribution. My apology.

Expert:  Mark Taylor replied 1 year ago.

Are you married?

Customer: replied 1 year ago.
Expert:  Mark Taylor replied 1 year ago.

So at 18 family members at $400,000 each your total gifts would equal 7.2 million. The gift and estate tax exemption is 5.45 million per person. So your you and your wife each would have a 5.45 million dollar exemption that is available.

Customer: replied 1 year ago.
there would be an estate tax applicable to the remaining $1.8M?
Expert:  Mark Taylor replied 1 year ago.

Yes, if you gave them all as a gift there would be a tax. If you split the gifts from coming from you and your wife you would be under the exemption. For instance, if you both gifted 3.6 million.

Customer: replied 1 year ago.
My original question was in the area of using an irrevocable trust. How would that work?
Expert:  Mark Taylor replied 1 year ago.

An irrevocable trust would provide you another option to simply giving money to your family members. It would also help reduce the amounts included in your taxable estate.

Expert:  Mark Taylor replied 1 year ago.

With a trust you would have more control over the amounts. You can limit when the distribution until a certain age, you can limit that distribution be used only for education etc.

Expert:  Mark Taylor replied 1 year ago.

Again, you are limited to the $14,000 before the gift tax rules come into play.

Expert:  Mark Taylor replied 1 year ago.

The gifts to the trust need to be present interest. This means that the individual has the right to withdraw the money for a certain amount of time. For instance, the beneficiaries would have up to 30 days to withdraw the money.

Customer: replied 1 year ago.
i can only fund the trust up to 14000? and after that be subject to gift tax?
Expert:  Mark Taylor replied 1 year ago.

Yes, any amount above the $14,000 would reduce your life-time exemption.

Customer: replied 1 year ago.
there is no way to avoid gift tax to my family using another means?
Expert:  Mark Taylor replied 1 year ago.

You could avoid the gift tax impact if you and your wife equally gift the amounts.

Expert:  Mark Taylor replied 1 year ago.

Of course your life time exemption would be reduced.

Customer: replied 1 year ago.
at $400K per member?
Expert:  Mark Taylor replied 1 year ago.

You both would be able to give each family $14,000 each that would be excluded from this amount.

Expert:  Mark Taylor replied 1 year ago.

So 504,000 would be applied to the lifetime exclusion.

Customer: replied 1 year ago.
but if the total gift is $400K, then we can only give $14K per year?
Expert:  Mark Taylor replied 1 year ago.

Let's say if both you and your wife gift $200,000 to a family member (for a total of $400,000). The amount above the $14,000

($200,000 less $14,000) would be $186,000. This $186,000 would reduce your lifetime exemption of $5.45 million.

Expert:  Mark Taylor replied 1 year ago.

There would be no tax until this is exceeded.

Customer: replied 1 year ago.
but I would have to pay gift tax though on the $186K
Expert:  Mark Taylor replied 1 year ago.

Only if you gift more than the 5.45 million.

Expert:  Mark Taylor replied 1 year ago.

In this example your lifetime exemption would decrease to $5.364 million.

Customer: replied 1 year ago.
I'll be right back
Expert:  Mark Taylor replied 1 year ago.

There would be no tax currently due. It would just lower the exemption that is available for your estate. Let say that your current estate is $10 million. If both the 5.45 million exemptions are available to you and your wife then when the estate passes to your heirs there would be no estate taxes. Gifting reduces both the value of your estate and this exemption.

Customer: replied 1 year ago.
What if I funded a company for each family member? And that company paid them?
Expert:  Mark Taylor replied 1 year ago.

If you fund a company and pay them it would be wages.

Expert:  Mark Taylor replied 1 year ago.

The company would receive a deduction for the payments.

Expert:  Mark Taylor replied 1 year ago.

Do you have a business?

Expert:  Mark Taylor replied 1 year ago.

One estate planning tool is the use of a Family Limited Partnership. Let's say you have a business that is valued at $10 million. A family partnership could be created where you own 99% and the other members own 1% combined. The value of the business would be discounted as a result of this structure.

Expert:  Mark Taylor replied 1 year ago.

I am going to step away for a few minutes but I should be back in about 15 minutes or so. I look forward to your response.

Customer: replied 1 year ago.
Mark I am a tax accountant
Expert:  Mark Taylor replied 1 year ago.

So you know about some of the gift tax rules.

Expert:  Mark Taylor replied 1 year ago.

How did you accumulate such wealth? Do you have any opening in your company or family :)

Customer: replied 1 year ago.
The question was for a client
Customer: replied 1 year ago.
He sold an invention (intellectual Property) and is giving his family financial gifts
Expert:  Mark Taylor replied 1 year ago.

Oh I see the irrevocable trust with give the client more control over the gifts. Setting stipulations etc. But there has to be a window where the beneficiary can claim the gift if they want. This is known as Crummy powers (old tax court case).

Customer: replied 1 year ago.
you're not conversant in irrevocable trusts?
Expert:  Mark Taylor replied 1 year ago.

In order from the contribution to the trust to be considered at gift (an not included in the grantor's estate) he would need to give up control. This is done by allowing the beneficiary to have the right to access the funds. Once the grantor make the contribution to the trust the beneficiary would receive notice that he or she has the right to withdraw the funds for 30 days. After 30 days the stipulations would be enforced (you need to be 30, you need to graduate from college etc.) The 30 day window is what I was referring to as Crummy powers.

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