Avoid Gift Taxes & Estate Taxes While Helping Family & Friends in Hard Times
October 19th, 2011
Gift tax and estate tax laws can really throw a wrench in the works when trying to help family and friends experiencing financial hardship in this difficult economy. Giving too much help of the wrong kind can subject those gifts to taxes or deplete your lifetime gift exclusion so that your estate becomes subject to taxes.
Forbes Magazine recently published an article with some great ideas on how to help family and friends weather tough financial times without incurring additional taxes. The article contains some good financial advice that is applicable right here in Dayton, Ohio. A lawyer well-versed in estate planning should review your plans before carrying them out, if you decide to use any of these strategies, to make sure they adhere to all state and federal laws.
Below is a recap of the article’s main points, but you can review the whole article here:
Forbes article on avoiding gift tax & estate tax while helping family & friends.
Gift Tax-Free Strategies for Providing Financial Assistance
Strategy #1: Give up to $13,000 in cash per year
This is the simplest way to give without encroaching on your lifetime exclusion or paying taxes. The federal government lets you give up to $13,000 per year tax free (up to $26,000 per year for married couples) to as many individuals as you want. If your adult son or daughter’s family needs more than that, write separate checks to them, their spouse, and even each of their kids if necessary. Just don’t give more than $13,000 to any one person or it will count against your $5 million lifetime exclusion under current estate tax laws.
Strategy #2: Pay for family member’s or friends’ medical, dental and tuition expenses
As long as the payments go directly to the provider, you can pay for tuition or medical and dental expenses of anyone you want without it counting against your annual exclusion or lifetime limit or paying gift taxes on it.
Strategy #3: Fund a Section 529 college savings plan on their behalf
This is one way to utilize your annual exclusion so that family members aren’t worrying about saving for college when financial times are tough. This is good financial advice because it has the additional advantage that the money grows tax free and can be withdrawn tax free as long as it’s spent on qualifying college expenses.
Strategy #4: Provide a rent-free place to live
Let adult kids live rent-free in your home or in a house that you purchase. Just make sure the fair market value of the rent is less than your annual exclusion amount.
Strategy #5: Give ‘em a job
Hire children or grandchildren for occasional needs or on an ongoing basis. Employment can range from anything such as child care or lawn care to bookkeeping or managing properties. However, it’s good financial advice to make sure you don’t pay more than you would pay a stranger or you can expose yourself to gift taxes and other tax issues.
Strategy #6: Lend money at below bank rates
To avoid gift tax and estate tax laws, credit you extend to family members requires all the formalities of getting a loan from the bank, including charging a minimum interest rate. But offering a 3.5% - 4% interest rate will be a lot more appealing than what any bank can offer. May sure your Dayton, Ohio lawyer reviews your credit agreement before extending the loan.
For more information on gift taxes, see our Free Resources section.