Posted on 02/02/2004 5:31:11 PM PST by mlmr
I don't have all the facts from this situation and I am merely looking for potential problems more than potential solutions because of the nature of this forum.
Whenever you give money to someone (which includes paying their debts) that you are not legally required to give them, you can be considered to have given a gift. When a gift exceeds 11,000 to anyone person you are making a potentially taxable gift. I am mostly bringing these issues up so that the casual reader might be alerted to the problem that could occur in structuring transactions like you mentioned without competent adivse. In all likelihood, the amounts are small enough that they would avoid being considered a taxable gift.
If, I understand that only one distribution from the IRA was made to you and you split the proceeds then a couple of things have occurred. First, you have your portion of the IRA and gave 1/2 to your brother. The monies you gave him were yours to keep and therefore the money given him could be considered to be a gift. Further, you and your brother have no immediate obligation to cover a debt of your fathers estate. Absent any other motive, the amounts you paid could also be considered a gift to his estate.
The reason I mentioned loans was that by documenting the transactions with bona-fide loan, you to your brother for his 1/2 and both your brother and you to the estate is that otherwise it could be assumed that you in essence gifted 15k to the estate by paying off the loan. The amount you gave to your brother was essentially a step transaction, or in other words he was acting as a conduit for you to accomplish a gift of 15k that exceeded the gift tax exclusion of 11k. Using loans that get repaid at the final close out, would avoid any semblance of a gift and out everyone back to where they would have been had you not paid the debts of your father.
Depending on the complexity of the disbursement, for a simple single question like this it could be as little as an hour's work, around $100. Cheap peace of mind. Our accountant does our taxes yearly for between $300 and $700.
When the taxpayer signs the 1040 form or the E-File form where a pin is transmitted in lieu of the signature, the statement begins
"Under the Penalty of Perjury......to the best of my ability all the facts are true and correct"
When HR Block counsels taxpayers to adopt this tactic they are suborning perjury!
The preparer signs and is subject to the same penalties. It's illegal!
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