Avoid These Potentially Troublesome Gift-Giving Strategies
Although there’s a large tax exemption limits for gifts you make to other individuals each year, there are still some gift-giving strategies that could land you in trouble with the Internal Revenue Service (IRS). Below are a few examples of the actions you should avoid.
Loans disguised as gifts
In some cases, parents or grandparents make large loans to their children with an intent to forgive the repayments every year in an amount that is equal to the gift tax exclusion limit. The IRS, therefore, makes it difficult for families to prove these are actual loans instead of just gifts.
The IRS always assumes a transfer between family members is made as a gift, paying close attention to if the borrower signed a promissory note, if you charge interest, if you demand repayment, if any of the loan was repaid, if there was any collateral on the loan and if there was a fixed repayment date.
Gifts given to one person, but intended for another
With the gift tax, you can provide as many tax-free gifts to as many individuals as you want, so long as the gifts to each person do not exceed the exemption limit. In some cases, people give gifts to one person that are clearly meant for another to get around that exemption limit.
A gift is not truly a gift if there are conditions attached to it. If you attempt to maintain any sort of control over the money or assets after you gift them, the IRS could become suspicious. For example, if you give a house to a child, but maintain the right to earn rent from the property, the transaction would not be legally considered a gift.
For more information and guidance on giving large gifts to loved ones as part of your planning process, speak with a knowledgeable Tampa estate planning attorney at BaumannKangas Estate Law.