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After reading through information on capital gains tax and estate tax, I read that a heir of an investment does not have to pay capital gains on that investment. That is it's transferred free and clear as long as it's under the $11.2 million inheritance exclusion? Also, a single person is able to gift another person up to $15k/year free and clear, or $30k for a married couple.

With that said, would it then not be possible to regularly gift a trustworthy relative money that they would then invest, and agree to will back to you when they pass (assuming that's before you) which you'd then receive with no tax imposed?

Travis
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2 Answers2

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There are some issues with this plan:

  • you have to trust they will do what you want with the money.
  • you have to hope that they won't need it.
  • you hope that the presence of this investment fund doesn't impact their ability to get Medicaid coverage for their long term care needs.
  • they have to die first.
  • you have to trust that their end of life documents don't direct the funds to somebody else, or that the money has to go through probate, or that they have other debts and the funds are used to pay those debts.

A concern is how will they avoid the taxes on the gains that take place during the years they have the investments. As long as the taxes on the gains are lower than your annual contribution, you could direct them to use some of your new money to pay those taxes.

If they still had income from a job they could put that money into a IRA, but that would only work for as long as they had income.

But the biggest problem is that if you put requirements on the money it isn't a gift. The IRS doesn't treat favorably transactions that are designed to use trickery to avoid the taxes.

Sure they could do this on their own, but the fact you are doing this in a coordinated way to skip capital gains taxes would make it illegal.

mhoran_psprep
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Not a good idea. Aside from moral and (as the other answer notes) legal issues, it doesn’t make sense to risk the full capital for the sake of tax on the income it generates.

Assuming you gift $15k a year for 10 years, your capital at risk is $150k. For simplicity, let’s pretend you can plonk it all in your relative’s account on day 1 and get 10% ‘simple interest’ each year. They’d earn $150k over the 10 years, but US tax at even the highest rate is less than 40% (less than $60k). So you’d be risking the principal $150k + after-tax income for less than $60k potential gain. This is assuming the relative doesn’t squander the money or leave it to the cat. Meanwhile, you have no access to those funds.

All told, this is a high-risk play. And we haven’t even factored in properly what happens when the taxman comes knocking.

Lawrence
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