Gift Tax Question

Assuming you mean a yearly appraisal, that should do it.

You might also want to consider creating an irrevocable trust to which you make modest gifts (e.g. $100) each year. This would require a gift tax return to be filed, which would start the statute of limitations running for each of those years. Stu

Yes, I should have typed "appraisals", and not "appraisal".

Irrevocable trust? Well, one of these days I really have to learn about trusts, and how they can help me and my wife. One rule that has served me well over the years has been to not put my money into anything I don't fully understand. And I've never taken the time to really understand trusts. Probably because what little I've read suggests to me that they are of more value to those to whom I give money (heirs or charities) than to myself or my wife. That may be incorrect, but that suggestion has removed the urgency of acquiring more knowledge. Thanks for your suggestions.

Best wishes,

(Frequently wrong, never in doubt)

--ron

There are different kinds of trusts and they are useful for different kinds of purposes. The most popular, a revocable living trust for estate planning purposes, is, as you suggest, of little practical value until both spouses have died. However by that time it's too late to save the tens or sometimes hundreds of thousands of dollars that can be lost to taxes and probate courts. The reason I suggested an irrevocable trust is to have a situation in which filing a gift tax return is required, to start the statute of limitations. There may be another option. If the gifts are going to be more than $12,000 per donnee, and you don't live in a community property state, you and your wife can file a gift tax return and elect to "split" the gift. That is that the gift be considered half from each of you even though tecnically the money not belong to each of you equally. Stu

Thank you for that information.

Although we are not in a community property state, we do own all significant stuff jointly. The only exceptions are or IRA's and our vehicles. Could you explain what "statute of limitations" means in this situtation? I don't know what it means with regard to gifting or irrevocable trust.

--ron

For this purpose not being in a community property state can help you. But you really should consult a local tax advisor to be sure.

There is basically a three year period after filing a gift tax return that the government has the power to challenge that return (assuming it wasn't fraudulent). If you don't file a return, the government can in theory audit your gift at any time. If they do that they could determine, for example, that the gift was all made in the first year, even though deeds were given for less than the exemption amount, because the plan to make the gifts was created at that time. Or they could decide that your kids really had no control over the property when you made the gifts, so the gifts were of a future interest, which would not then qualify for the annual exclusion. These kinds of things are not likely, but they are possible. And filing a gift tax return, if you can do it in a way that doesn't make them even more suspicious, is cheap insurance. I'm sure others here, those who actually prepare tax returns, will have more to add. Stu

Thanks.

You've given me some things to ponder.

Best wishes, --ron

--ron

Some more thoughts on this issue, that just occurred to me. To avoid yearly appraisals and deeding, as was a suggestion, why not just sell them the property at FMV (one appraisal, one deed) and take back a mortgage at a reasonable interest rate. Then it would just be a matter of forgiving $48,000/year of the amount due on the mortgage, until it is "paid off". Is that allowable?

--ron

It's certainly allowed. But you have to be careful not to make it look like you are setting it up in advance necessarily to do it every year, even if you do. Each annual forgiveness should be individual and not promised in advance. One approach would be to have them actually make one annual payment by check, and you either send it back or keep it and write "cancelled" on it. Oh, and make sure you take a mortgage in the property to insure payment. There is one other thing. A sale means taxable income. If you don't qualify for the exclusion for sale of a residence, your forgiveness of purchase payments will be taxable income to you as if you had actually received money. Or your kids could be taxable on that money as cancellation of debt income. Stu

Hmmm.

Sounds as if I need to both read more, and also check with a professional before setting this up. Thanks for pointing out that pitfall.

The "sale" would very definitely not qualify as a tax-free event.

--ron