Grandma selling house, can she give $40k to my mom?

[ithaca]

My Grandma is selling a house that she built and lived in from about 1955-1995. My grandma moved into a new house in about 1995, and has rented out the older house since then. She is in the process of selling the house and wants to divide the profits between her 4 children (about $40k each). So once the sale of the house is complete, can my grandma just write each of them a check for $40k?

My mom has talked to a lawyer and he said that it would be perfectly fine to just write a check to my mom for $40k. But with all of the tax rules and gift exceptions, I figured I would come here for a 2nd opinion. Thanks!

[Scanner]

My understanding is that only $10,000 (maybe it's $12,000) is exempt from taxation from a gift.

After that, the tax can be quite hefty.

I bet Internal Revenue Service has information.

[disneysteve]

Your lawyer is right in the fact that your grandmother can just write checks for 40K, but Scanner is correct that there will be gift tax to deal with. The 2007 exclusion is $12,000 per person, so the first 12K wouldn't be taxed, but the remaining 28K would. Gift tax is typically paid by the giver, not the receiver. I don't know what the tax rate is so I can't tell you what it would cost your grandmother.

To avoid the tax, she'd have to give no more than 12K to each child per year. She can get around that somewhat if the children are all married by giving 12K to the child and 12K to his/her spouse.

I'm assuming that your grandmother is not currently married (perhaps widowed). If that is wrong and your grandfather is still around, then each of them can give each child and each spouse 12K/year which would solve the problem.

[sweeps]

I'm assuming your grandmother doesn't have a large estate? Then it is unlikely she will owe any gift tax (although she'll probably have to file a Form 709.) This document explains it fairly well.

[ithaca]

Thanks for the replies. I was on the same page as you guys that 12k (or 24k if she includes my dad) was the max my mom could receive without getting taxed. But since she is getting advice from a lawyer, I had hoped that he knew about some "parent estate sale" exception.

[vsjhoc]

I'd check with an accountant (CPA) instead of a lawyer.

[ithaca]

I'm assuming your grandmother doesn't have a large estate? Then it is unlikely she will owe any gift tax (although she'll probably have to file a Form 709.) This document explains it fairly well.

You are correct, the house sold for around $200k.

I just talked to my mom on the phone. The lawyer told her that there is a $1 million lifetime tax exemption so as long as the total amount that my grandma gives her is less than 1 million, neither will owe taxes on the gift(s). But just to be clear, my grandma sold the house to someone outside of the family, and is just giving the money to my mom and uncles. The lawyer knows this exact plan and still claims neither my mom nor grandma will owe any taxes on this $40k.

[sweeps]

You are correct, the house sold for around $200k.

I just talked to my mom on the phone. The lawyer told her that there is a $1 million lifetime tax exemption so as long as the total amount that my grandma gives her is less than 1 million, neither will owe taxes on the gift(s). But just to be clear, my grandma sold the house to someone outside of the family, and is just giving the money to my mom and uncles. The lawyer knows this exact plan and still claims neither my mom nor grandma will owe any taxes on this $40k.

Based on what information you've told us, I agree with the lawyer.

It would be more complicated if your grandmother were selling/giving her house directly to her children.

But regardless, vsjhoc makes a good point. Sometimes consulting a CPA is advisable. For example, we have not discussed any state tax issues, etc.

[ithaca]

Thanks for the info sweeps. Here is the website that the lawyer provided to my mom which explains why she is able to receive over $12k as a gift. This is news to me!

Why Plan Your Estate?

[Like2Plan]

I agree with the advice for your Grandma to see a CPA. She will have to fill out a form 709 with her taxes for any gifts which exceed the 12K limit. It is a tricky form to navigate. Link to 709
As pointed out before, your Grandma will not be taxed but it goes against the estate tax limits. If her estate is not anywhere near the limit, then no worries.

[InDebtInDC]

You need an estate planning attorney as well. A CPA only knows how to do tax accounting, and may not know how to structure the deal to avoid tax implications using complex legal instruments.

[kimiko]

Each person has what is called Unified Tax Credit (Federal Tax only).

In the case of gift, the credit has an exemption equivalent of $1 mil.

In the case of estate tax, from 2006-2008, the credit has an exemption equivalent of $2 mil, set to increase to $3.5 mil in 2009 and will be repealed in 2010. Congress will then decide what it should be after that.

If you used up the Unified tax credit via gift, there won't be enough left when it's time for dividing up the estate. But since it's $112,000 (after $12,000 annual exclusion per donee) total and assuming remaining estates isn't large enough to exceed the Unified tax credit limit, there shouldn't be any problem.

Calculation for Estate tax:

Taxable Estate
+ Taxable gift made after 1976(Previously reported)
------------------------------------------------------------------
Total taxable transfers

Total taxable transfers
- Any gift tax paid
- Estate tax credit
- Any other tax credit
---------------------------
Estate Tax Liability.