The Receiving End of financial gifts

sparksalsSeptember 3, 2006

I post in another forum here quite frequently, but have a situation that made me come to this forum.

The other thread from a parent about tax free financial gifts got me thinking about our situation. We are on the receiving end of such gifts from my MIL. Currently, she gives us (and her other kids and grandkids) $10K per year as a tax free gift that is neither taxable to her nor us.

MIL was left quite wealthy when FIL died and she has a huge tax burden. In order to alleviate some of that, she is (with a financial advisor) looking for ways to gift her money to her kids while she is still alive. Apparently, NJ is notorious for taking their more than huge piece of the estate pie, at least they did in FIL's estate.

She told dh she is able to gift a one time $1M tax free. She was thinking gifting dh and the other kids an equal amount of that $1M. However, she is concerned about the tax burden it will put on us. Although we'd like to receive that kind of money (who wouldn't?!), we don't want to be put into taxation purgatory with such a gift. We are in AZ if that helps and she's in NJ, but looking to sell her home and retire to another state.

Of course, we have a good financial planner and would do some investments, but we are most concerned about the extra tax burden. With sound investment, we could set ourselves up for our future, but at the same time, who wants all that money to go to Uncle Sam?

Any ideas? Has anyone heard of this type of gift?

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WRONGO!!!! NJ sucks. The fed gifting rate goes on a "look back" if she dies within 3 years. All that gets added back into her estate in NJ. As far as I know, the mil is a lifetime thingee, not a one shot thing.

Dunno who her tax advisor is, but the tax burden is on the gifter, not the giftee... guess he might be charging her quite an hourly sum. Check him out.

Have her gift all the kids, grandkids, friends, whomever the 12K allowed this year. Pray she lives at least four more years.

Grew up in NJ, all the rich relatives died in NJ, know about such things.

    Bookmark   September 3, 2006 at 10:09PM
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Her tax advisor didn't tell her that the giftee is taxed. I was worried about that in terms of receiving the gift and how it would affect our taxes. Glad to know it is tax free for us.

So, if the mil is a lifetime thing, that means her other financial gifts to us in the past are included in the million max? Is that a federal thing or specifically in NJ?

Now I know why she wants to move to another state. After dealing with FILs estate, the tax paid was exhorbitant!

    Bookmark   September 3, 2006 at 11:27PM
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If you don't already have an accountant, I'd encourage you to get one. In my opinion, questions about this amt of money are for the pros.

    Bookmark   September 4, 2006 at 6:52AM
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Sorry, guess I forgot to state that she does have a financial advisor, but when she mentioned this to us, she had not spoken to her about her thoughts. She did not realize that the giftee is not subject to taxation and I was asking more for dh and myself because we didn't want a huge tax burden.

    Bookmark   September 4, 2006 at 1:37PM
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Sparks: might want to have MIL look into Tax Free Municipal Bonds. No federal tax, no state tax if she gets them in her state, dunno about local (like NYC) taxes, cause have no experience with them, but I doubt they'd be taxed much.

Most people look at stocks or mutual funds or, (ugh) Treasury Bonds as 'investments'... I was skeptical at first, but an aunt had a bag load of them. I tipped my toes in the water five years ago, and am hooked on them ever since.. tax free income!

AA or AAA rated and insured lets you sleep at night and not check the stock prices hourly. Peace of mind.

    Bookmark   September 6, 2006 at 2:57AM
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Maybe y'all shd look into having her open joint accounts w/ each of her kids (or whoever she's gifting). Example: She opens a $1M [jealous!] account w/ her son, your DH. Depending on the type of account, when she dies the co-account holder would either not be taxed on any of the money, or would be taxed on half. Gift tax doesn't come into it (at least not in PA). Then, DH can put your name on the account as co-holder.

Meanwhile, she shd move out of NJ! Check out for recommendations on tax-friendly states (they have such articles every so often).

    Bookmark   September 6, 2006 at 12:54PM
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Many "financial planners" were, in the past, required to have a simple training course that was taken by people who were planning to sell mutual funds. Pretty rudimentary.

In those days, people who had taken the course that stockbrokers take were much more knowledgeable, and many people calling themselves "financial planners" later took a six-component course leading to be a Chartered Financial Planner (later changed, and now the designation is "Certified Financial Planner"). In recent years regulations have been tightened a good deal.

However, with the amount of money to which you refer, it's important to have an accountant advise, as they have thorough knowledge of the laws, and in cases such as yours, making any mis-steps can be costly.

And accountants are required to keep up-to-date as new rules come out. As you know, the tax rules change frequently.

Many accountants are quite conservative, and may suggest investing systems that persons willing to deal with some level of risk would find more safe that they could handle.

In our area, if one invests in assets where the amount of the principal can't grow, one loses.

All of the return that such principal develops is developed currently.

The tax man wants to talk to each of us annually relative to our current income - and in Canada, some types of investment income is taxed at a much lower rate than others (mainly the kind that most folks use).

If one earns about 4.5%, and is taxed at 33%, that takes the amount of after-tax money left in hand at 3%.

And if the size of your principal can't grow - you need to add some current earnings to it annually in order to keep your purchasing power intact.

If you'd given the bank $10,000.00 15 years ago in a 5-year guaranteed certificate, and renewed it twice ...

... when you invested it, the $10,000. would have bought a decent car.

Not now, 15 years later.

The government quotes figures for inflation, i.e. growth in consumer price index ...

... but most of us don't believe them, as our experience is that prices that we pay are rising faster then the recent 2 - 2.5% that they tell about. Here in Canada, for example, people have been telling us lately that the index doesn't include energy cost!!!

Check out your various courses available carefully with a fully qualified person - in your Mom's state and yours.

Not in the state of confusion, though, we hope.

Moreover, if interest rates rise, as many expect them to do, especially in the U.S., carrying their huge government plus individual debt, plus government going deeper into debt each year (under a conservative regime, no less!) another problem arises for bond holders.

If they hold them to maturity, they'll receive the full face amount, but if they want to sell them prior to maturity, the price offered by a potential purchaser will be much lower, for s/he can buy a current issue paying much higher rate of interest.

My bias is in favour of high quality stocks for the major part of one's portfolio, even for an old fart like me, past 756 - drat this keyboard ... that figure was supposed to be 75: I ain't in the running against Methuselah!

For reasons that I won't go into here, but will tell you if you email me.

Good wishes for your Mom's choosing to deal with her assets in a way that won't back-fire later on either her or you her offspring.

ole joyful

    Bookmark   September 6, 2006 at 4:03PM
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Thanks for the responses. I'm really new to how things work in the US. I'm from Canada, but have lived in the US for 4 years and will be here for some time since I married an American.

I'm trying really hard to learn the ropes and figure things out. It makes it difficult when each state is different and there's so much to learn in terms of bonds, treasury bills etc. I guess I should take some sort of course to learn all this stuff.

I was pretty knowledgable at home, had an above average grasp on Canadian financial issues, but here it's just so different.

As my financial planner told me (who lives here, but is Canadian as well), Canadians are taxed heavily throughout their lives and get a break when they die. In the US, you get a break while you're alive and your estate pays through the nose upon death.

    Bookmark   September 6, 2006 at 10:32PM
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I would have your MIL contact a reputable Estate Planning attorney, and get going on her plan. If you are really talking about millions here she should be looking at utilizing trusts. If she has any charitable intentions that opens up even more possibilities (and lifetime tax benefits to her).

I don't know how things work in NJ, but I am not really sure why your mil would have had huge tax burdens at the death of her husband. Fed allows unlimited transfer of assets tax free between spouses. The subsequent heirs would have the problem. Also, I do not believe there is a look back on gifts to the children, only to a trust, at least as far as the Fed is concerned. Every state is different, though. In addition, the Fed will charge the non-spouse beneficiaries INCOME taxes on any inherited tax deferred assets (ie, IRA's, Annuities, Employer Retirement Plans, etc.). This is called income in respect of a decedent (IRD). Bottom line is your MIL really should speak with an ATTORNEY! The accountant and financial advisor can be there too so all are aware of the situation and are working in concert. Good luck.

    Bookmark   September 7, 2006 at 11:40AM
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saggysmom - as I stated before, NJ has different rules than most other states. Even if federal taxes are exempt in the transfer after the death of a spouse, NJ still taxes alot of that stuff. All the tax MIL paid from FIL's estate was NJ state tax that overrode (for lack of a better word) federal estate law. Essentially, the federal govt may not tax it, but the state of NJ does.

The lookback is not to the children, but to MIL's estate. Essentially, if she dies within three years of giving these tax free gifts (aka the 12K fed tax free to however many people she chooses), the feds don't tax her on all the gifts, but NJ will add those gifts back to her estate and tax them if she dies within a certain time of giving them.

    Bookmark   September 8, 2006 at 2:09AM
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Ask your skilled, experienced, well-credentialled advisors in NJ and AZ what would be the situation if she sets up (a) joint account(s) with one or a number of relatives or other would-be beneficiaries.

Possibly in NJ, but likely preferably in other states.

Just an idea. Run it past the experts before acting on it, though.

ole joyful

    Bookmark   September 8, 2006 at 5:33PM
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have your mil move out of NJ!!!!

    Bookmark   September 20, 2006 at 3:08PM
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If she moves out of state, be sure all the money is taken out so the state cannot continue to collect taxes. She should talk to a CPA specializing in Estate Taxes and maybe move some of the money out of state into safe investments. Also make sure she has a will. Have her look into a living will or some other way to avoid probate taxes.

    Bookmark   September 21, 2006 at 10:17PM
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