Using RE to bypass inheritance tax

[Jimmy H.]

I had a thought that you could potentially use RE to bypass inheritance and gift tax issues. I know that you are only allowed to gift about $12,000 to any one individual, and I know the goverment taxes you when you die and want to pass on wealth to your heirs.

I know this situation would involve a lot of trust between the parties and is situational....but consider this scenario. Parent has cash (or could potnetially liqudate mostly into cash) and buys investment property in the child's name. Simple as that, I don't see how this is a gift or would violate any laws - but that is why I am throwing it out to al BPers to poke holes in.

If a parent buys a property and puts the name directly in the ownership of a child (or an LLc that a child owns), isn't this an easy way of bypassing inheritance tax issues?

A variation on the theme - You could also form an LLC that is 99% owned my child and 1% owned by parent and the parent rolls their property into the LLC name?

Will this work? why or why not?

[Dave Toelkes]

Originally posted by jaham:

Your mention of paying bills in someone else's name is similar to what im thinking about, except you just buy the whole property in someone else's name.

The gift tax rules state that you are entitled to an annual exclusion of $13,000 per recipient. Under gift tax law, you're entitled to present a gift valued at up to $13,000 to any number of individuals per calendar year without paying gift taxes. Both you and your spouse are eligible for the exclusion, so using both exclusions, you and your spouse can give up to $26,000 to an individual per calendar year without incurring any additional gift taxes. Note, the recipient does not have to be your child and does not have to be a minor for a married couple to combine their gift tax exclusions.

The gift tax rules incorporate a lifetime exemption of $1 million. Even if you give more than $13,000 to a single recipient annually, you still don't have to pay gift taxes until you exceed your lifetime exemption of $1 million. You could give your child an annual gift of $33,000 ($20000 more that the annual exemption) for 50 years before you had to pay a penny of gift taxes. Only the amount in excess of the annual exemption counts toward the lifetime exemption, so if you give $33,000, only $20,000 counts toward the lifetime exemption. Finally, only the amount in excess of the lifetime exemption of $1 million is subject to gift taxes. Gift taxes, if any are due, are paid by the giver, not the recipient.

The IRS does provide exceptions to the annual gift tax exclusion. Qualified tuition and medical expenses do not count toward the $13,000 annual exclusion. If you pay tuition directly to a qualified educational institution, or you make payments directly to a qualified medical care provider, these payments do not count toward your annual gift tax exclusion. Theoretically, you could pay $50,000 to an educational institution and still give $13,000 in cash or other goods to the beneficiary without paying any gift taxes. These are the only bills that are exempted from the gift tax exclusion. Paying rent, mortgage payments, grocery bills, etc. during the year for another individual does count against the annual gift tax exclusion.

Gift tax rules and estate tax rules are two different things. Gift tax rules only apply to gifts made during an individual's lifetime. If an individual exceeds the lifetime exemption during his or her lifetime, he's subject to gift tax rules. If gift taxes are being calculated as part of an estate, and the decedent exceeds the lifetime gift tax exclusion, the estate is subject to estate taxes; not gift taxes.

Some states have individual gift tax rules rules that may set different threshholds for the annual exemption and the lifetime exclusion. Not all states follow the federal income tax rules for gift taxes. You also need to check your state tax law if you are considering making a sizable gift to an individual.

Finally, a gift includes both money and property, so giving someone the deed to property is a gift of equity. The value of the equity given counts toward the annual gift tax exclusion. Deeding property to an LLC, then giving somone an ownership interest in the LLC is also a gift under the gift tax rules.