Today TaxMama hears from Karen in Arizona with this sad question. “A parent distributes an annual gift of $13,000 to a child for 4 years depleting all assets. If the parent requires full time nursing care before the end of the 5th year and has only Social Security income available, is the child required to return the gift funds and all interest earned?”
Dear Karen,
In a word?
NO.
A gift, according to the Merriam-Webster dictionary, is something voluntarily transferred by one person to another without compensation.
According to IRS – Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.
For tax purposes, when there is consideration, an obligation to return the money, it’s not a gift. It’s a loan and requires interest to be paid by the recipient, and reported as income by the giver.
In the real world, once you give a gift, you have given up all rights to it. The recipient gets to do whatever s/he wants to with the money. If your child chooses to help you, that’s probably a good and kind thing to do. However, if the child is a selfish beast, or has spent the money – those are the breaks!
It’s never wise to totally deplete your savings simply to avoid taxes. Folks make those maximum gift transfers each year because their asset values are so high, they want to avoid estate or gift tax. This practice is foolish for folks of minimal means. Unless, of course, you’re trying to deplete your assets so you can receive MediCal or other low-income services.
Wish I had better news for you. But you cannot compel your child to return any of the money – much less interest in it! Now, it’s all up to how you raised him – or her.
And remember, you can find answers to all kinds of questions about gifts and other tax issues, free. Where? Where else? At TaxMama.com.
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