Gift to Family Members

[Spursfan99]

What is the name of your state? MA

Hi Everyone,
For the past few weeks I have been trying to research the best way to move forward with an event that will happen this year. My mother, who is a Non US Citizen, wants to gift us (my brothers family and mine - which include 3 minors and 4 Adults, all US Citizens) around $600,000 that would be used to purchase a Real Estate Property. I intend to find a lawyer in the end to run through this situation but want to be fully educated before starting that conversation. From all my research, an Irrevocable Domestic Trust would work (I preferably wouldn't want the trust to own a Non US holding company, which would then hold the asset but have read conflicting information on Cash being gifted as Tangible or Intangible asset). The wire would come from outside the US (Which I think makes it intangible and not needing an offshore holding company - I could be wrong) into a US bank account which would fund the Real Estate Asset. We would have 7 beneficiaries and after the terms of the trust are met, the property is sold to the ultimate beneficiaries.

I have to spend some time to figure out what our exposure is going to be when the sale takes place in terms of tax that needs to be paid for any appreciation from the cost basis and at what rate. I had a few questions though that I haven't been able to figure out:

1) Does the Trustee have a responsibility to report the gift to the IRS or the beneficiaries? The reason I ask is because normally there is a reporting requirement per person when they receive over $100,000 a year from a Non US resident. While there is no tax liability, I want to ensure the reporting takes place so that we don't get dinged down the line. If it was at the Trustee level, then I would think there is a reporting requirement and if its at a beneficiary level, it probably isn't.

2) If the sale of the property takes place before the minor beneficiary turn 18, can the proceeds remain with in the trust until they are old enough to access it?

If someone thinks there is a better structure that can be used, please do let me know. Any help is greatly appreciated. Thank you.

 

[FlyingRon]

reYou need to talk to an attorney about this. If the mother is giving you money with the express stipulation that it be used for something may make it something OTHER than a gift. Even a gift of that much from a non-US entity will need to be reported and you better do it right as the penalties are severe.

Yes, giving that much money to a trust of any form will need to be reported. The number of beneficiaries is immaterial. Further, you can't dodge the requirements by having it doled out in smaller chunks to many people. The reporting law applies to the aggregation of all related parties (the government is on to that dodge).

MONEY is a tangible asset whether it is in the form of cash or in a bank account. Intangible assets refer to what we commonly call "intellectual property" and corporate "goodwill."

The trust can dictate when it is created how the assets are dispersed so the answer is yes the trust can hold the assets until the beneficiary is 18. Note, however, your second pretense is wrong. THere's nothing that prohibits a minor from "accessing" money.

But this brings up another good point for you to discuss with your lawyers. It's usually a BAD IDEA for MINORS to be titled to property. The problem is that they can not CONVEY it, so if you wanted to sell it guardians (the parents will NOT suffice) must be appointed by a court to represent the child's interests in the sale. If the property is owned by certain trusts, you can avoid that.

 

[Spursfan99]

Thanks FlyingRon. Regarding the reporting requirement, I totally agree with you and don't want to get penalized later just because we thought nothing needed to be reported. I wasn't able to find much on the reporting requirement being at the trust level or beneficiary.

As for wiring/depositing money, I have read exactly what you said but Iv also read when a Non US citizen gifts money from a non US bank account, it will be treated as IP. (http://publications.ruchelaw.com/news/2016-08/Tax101_US_Trust_Foreign_Settlor.pdf - question 5)

I do plan on talking to a lawyer. I think my mothers old schools position is that she wants to leave it in as asset that will most probably appreciate and accrue income. At the time of realization, it will be potentially worth more and also because it’s domestic ensure there isn’t any funky yearly FATCA/FInREp etc reporting required.

 

[FlyingRon]

I don't think I fully agree with your interpretation of the answer to that question. Still, it only applies to gift tax which is distinct from the reporting requirement. In the end, $600K isn't going to to be taxable tangible or not unless there is a lot more gifting going on than just this.

 

[Taxing Matters]

What is the name of your state? MA

Hi Everyone,
For the past few weeks I have been trying to research the best way to move forward with an event that will happen this year. My mother, who is a Non US Citizen, wants to gift us (my brothers family and mine - which include 3 minors and 4 Adults, all US Citizens) around $600,000 that would be used to purchase a Real Estate Property.

Tell me this first: does your mother intend for this to be an immediate gift of the cash for the two families to then use to buy real estate that would then be owned by the 7 citizens? Or does she want to effectively own the property until she dies? And will this property be in the U.S.? That makes a huge difference in how I would do this. Either way, what you describe for the plan may be more complicated than is really necessary to accomplish the goal.

 

[Spursfan99]

She would intend for it to be an immediate gift to the two families and will give up full ownership/rights to it. The property will be in the US.
Would you recommend (and I can then do my own research as well) an alternative?

 

[Taxing Matters]

She would intend for it to be an immediate gift to the two families and will give up full ownership/rights to it. The property will be in the US.
Would you recommend (and I can then do my own research as well) an alternative?

Ok, so it is an immediate gift of the cash to the 7 family members which she will wire to them from her account outside the United States to an account of the donees (persons getting the gift) in the U.S. You said that she is not a U.S. citizen, and if she also not a resident of the U.S. for tax purposes then that gift is not subject to U.S. gift tax, so your mother would have no worries about a U.S. gift tax obligation. The debate over whether a bank account or cash is tangible or intangible property under the gift tax rules is really not important here in my view because the situs of the gift is considered to be outside the U.S. anyway. It would matter if she made the gift to you from a U.S. bank account that she held or controlled. (Of course she would want to ensure she complies with any tax laws or currency restrictions her own country has.)

The gift is not income to the 7 family members getting either, so they'll have no U.S. tax consequences for receiving the gift, though they do have to file Forms 3520 and perhaps FinCen Form 114. See the IRS article on gifts from foreign persons.

The only reason I see a need for a trust here is because there are minor children involved. There are several ways you can work it. The problem with having the trust own the property for all all 7 as beneficiaries is that they then must all be happy with whomever the trustee is and hope the trustee will manage the trust to their liking. It might also limit the flexibility a bit. Another option would be to wire the funds to an escrow account for the 7 donees, with the escrow agent then distributing the cash to the various beneficiaries (with one or more trusts taking the cash for the kids) and then the beneficiaries then join together in buying the property they want to own together, along with agreement among them how the investment will work. That way the adult donees own their share outright and don't have to rely on a trustee to watch out for their interests.

Sitting down with a lawyer to go through the various possibilities would likely be helpful for the donees.