Dear Len and Rosie,
My sister recently divorced. She was able to keep her home, but she had to pay her ex-husband $200,000 for his half.
Our mother, who is 82 and is worth over $2 million, gave him the money to get him off the title to my sister’s home.
What are the tax implications of this?
My mother says she can take the money from my sister’s inheritance. Everyone thinks this is a good idea.
How do we do it? Should my mother be on the title to the home with my sister? Should my sister give our mother a promissory note even though she wouldn’t be able to make payments on it?
When a parent gives money to a child, it is presumed to be a gift and not an advancement against the child’s inheritance.
The best way of dealing with this, assuming your mother doesn’t want or need the money back during her lifetime, is for her to amend her estate plan to take this gift into account.
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She can leave each of her other children $200,000 off of the top to make up for this gift, and then leave everything else equally among the children, assuming that this is what your mother wants to do.
There are not going to be any adverse tax consequences to this gift.
Your mother will have to file a gift tax return, IRS Form 709, with her income taxes next year, but she will not have to pay any gift tax, because it will be paid by her federal gift and estate tax unified credit. which in 2019 protects $11,400,000 from gift and estate tax.
Your mother’s $200,000 gift will reduce the amount of her assets that will pass free of estate tax by $185,000, which is $200,000 less the $15,000 annual gift tax exclusion.
Unless your mother wins the lottery, this isn’t going to create any actual gift or estate tax liability. And just to be clear about it, your sister does not have to pay income tax on this gift at all. It’s a gift, not income.
Doing it this way is easier than your mother being on title to property with your sister, and it’s probably more fair. It is also better than having a promissory note your sister won’t be making payments on, because the tax authorities may assume the interest your sister doesn’t pay as having been gifted back to her.
Your mother could even be made to pay income tax on interest payments she never receives. Do not open this can of worms.
If your mother has a trust (which she ought to have, given that a $2 million estate earns a lawyer $33,000 in probate lawyer fees), she can amend the trust to include a schedule of advancements to make things even when she dies.
This way, your mother can record future gifts made to each of her children and avoid having to go back to her attorney every time a child needs money.
Len and Rosie