Parents buying apts for kids (estate taxes)

The federal gift tax lifetime exemption, which had never been greater than $1 million since the present gift tax was enacted in 1932, has now been increased to $5 million under the 2010 Tax Act signed into law on December 17, 2010.

This presents a unique opportunity for you if you have already used all or nearly all of the previous $1 million exemption. You will now be able to make additional, substantial gifts up to the new $5 million limit, without any federal gift tax whatsoever.

If you have been "on the fence" about making substantial gifts, now would be the time to put your gift-giving plan in place, since these 2010 Tax Act provisions expire December 31, 2012, unless they are extended by Congress.

http://www.riker.com/articles/index.php?id=11416

riversider - funny you should post this. was just discussing with my estate attorney: if you use $4m of the $5m before the sunset, do you maintain $1m after the reset or have you used it?

his answer: "wait until the law goes into effect to find out"

also, doesn't the structure of this law favor the married? what about wealthy single moms or widows with young children? should they not receive the same benefit as a married couple?

Manhattan is a very unique place. It would not surprise me if Manhattan didn't have the highest percentage of wealthy parents(domestic and foreign) helping out children with the purchase. Living expenses suddenly become quite affordable if one only has to pay taxes and maintenance. Plus in Manhattan you don't need a car.

I wouldn't be surprised, either. A lot of my friends were beneficiaries of such arrangements.

"doesn't the structure of this law favor the married? what about wealthy single moms or widows with young children?"

The $5 million exemption is per person.....a single mom can gift $5 million, a single dad can gift $5 million......put them together and the couple can gift $10 million. If you clone them, they can gift $20 million.

It doesn't favor the married; it favors the per person estate.

understood, however you'd have to expect that high net worth couples would maximize the exemption ($10m) regardless of which spouse is "responsible" for the wealth. however, if a father is a widower whose wife's family passed $50m to them while she was alive, the now single father can only transfer $5m to each of his issue as opposed to $10m if the wife were still alive.

Creating more spoiled brats, just what we need in this city.

e76, you are absolutely correct. I don't mean to be flip, but that's exactly what happens when you die. You cease paying taxes, but you also cease receiving tax breaks.

Parents buying for children in cash force field on. That oughta do it.

Spoiled brats that either outright lie or hem and haw about who bought the apartment for them.

These kids get the world handed to them and then act as if they came from nothing and fought tooth and nail to get what they have.

But no one in their social circles seem to care b/c they are all living the same lie.

"This means that a parent can give a child as much as $5 million tax free; if two parents are involved, make that $10 million."

We need to end this loophole right away.

Socialist, a scenario - lets say I found a cure for all cancers and earned millions of dollars. You seem to fell that I should pay 90% tax on my income and then pay a death tax of a minimum 55%. And then not be able to transfer my wealth to my family with gifting while I am still alive. This could take away much incentive for people to try to do great things knowing that if you do something special you could not help your family out.

Why kick them out of the nest when you can buy them a nest.
When you support your adult children, you condemn them to the support.
Much smarter to fill them with the tools necessary to succeed.

Well, why teach them to fish when you can buy them fish forever.

When I see my father today I'll ask him why he didn't buy me an apartment.
I know what he'll say.
He didn't want me to get distracted from all that student I acquired during my education.

I was curious how many posts it would take before the I hate the trust fund babies talk came out.

Another aspect. Caveat donor. It may seem to be a great idea to give little Johnny and Mary 5 or 10 million while they are still young and adorable. Later they may move to New Zealand and call you once a year. Or worse, live within a mile and never visit. Maybe you would still want to give them that money. And maybe you'd prefer a charity.

It will be interesting to see the exit strategy for some of these parental buys, especially when it is multiple children. We have one of these in my building. Parents paid $1.75MM for the apartment 5 years ago when Johnnie and Jane were NYU students. Both now out of school, with on and off jobs, and the female's boyfriend appears to have moved in, and maybe the male's girlfriend too. I don't think they collectively can even afford the maintenance and taxes; it seems like there might be another roommate in the apartment. The kids are in their mid-20s now. Unless mommy and daddy buy another apartment, the living situation will come to a head soon, and I doubt mommy and daddy need an 1800 sq ft 3 bedroom Manhattan respite from Connecticut.

There is no exit strategy. Parents think that the kids either sell or rent it out. Real Estate is trans-generational.

ny sport, let's be honest for a second. you're a rich guy. what are your plans for your own children?

Isle_of_lucy - you die, you stop paying taxes. if you own income-producing real estate, your estate pays taxes until that property is passed on. Taxed even in the afterlife. Now, I realize I'm opening a HUGE can of worms here, but when is enough, enough?

As for the trust fund baby haters - I (mostly) agree - most of these kids don't know the meaning of hard work, however, some do apply themselves. As with any stereotype, there are those whom live up to it and those whom defy it.

e76 who if memory serves grew up in short hills, please tell us about the hardships you faced growing up.

you idiots trip over yourselves declaring your success and status and $ savvy, etc. try really hard to concentrate and realize that the stupid rich kids you so dislike are the bigger version of YOUR OWN CHILDREN

"I was curious how many posts it would take before the I hate the trust fund babies talk came out."

If you guessed 10 posts, you were right!

Just saw this first hand. Parent (non US) bought $1.300,000 apartment (then $100,00 renovation) for child going to business school in NY. Kid didn't find job in NY after graduation - left apartment (renovated and fully furnished)after 2 1/2 years to go back home. (She does however, still pay for cleaning service monthly). Truly unbelievable.

Cleaning device stimulates the local economy
Shadow inventory in no rush to change hands
This is the beauty of manhattan island
It goes up and down with the tide but it's displacement masks the change

Service

<-- did not grow up in short hills. nice mall, though.

"This means that a parent can give a child as much as $5 million tax free; if two parents are involved, make that $10 million."

We need to end this loophole right away.

I agree. The loophole that lets the gov't steal that money definitely needs to be closed.

I think it's the nature of our tax system to constantly attempt to fix problems or gain votes or both. There will always be some interested group and sympathetic Congressman always looking to help out with a new subsidy. The best way is to abolish all subsidies and tax breaks and go with a flat tax. Of course this would make it much harder for politicians to finance their campaigns..

"The best way is to abolish all subsidies and tax breaks and go with a flat tax."

What does the first part of this sentence have to do with the last? Eliminating subsidies and tax breaks (a.k.a., "loopholes" or "corporate welfare" or for that matter deductions for mortgage interest or charitable contributions) has nothing to do with flat vs. progressive tax rates.

But nice job trying to hide your regressive flat tax agenda (i.e., the wolf) behind the apparent common sense of eliminating subsidies to interest groups (i.e., the sheep's clothing).

I'd go with a flat tax, if we included all government spending, including SS and Medicare. Everybody gets taxed at 24% (since that's what we are spending now), on all earned income above $24,000, no exception. The Hedge Funders and corporate honchos would cry big fat tears at the injustice of raising their effective tax rate by at least 7 or 8%. Just for laughs, I'd want to see lobbyists and tax lawyers try to get jobs in an obsolete world. Who are you kidding? It will NEVER happen. This is what will happen: taxes will go up for great unwashed, services will go down further, while the top 1% reaps the outsized benefits of super-low taxes in a globalized world. You know why? because most lawmakers belong to that top 1% and there is no shortage of fools to vote for them.

"I was curious how many posts it would take before the I hate the trust fund babies talk came out."

In NYC does a 5 million dollar estate make a trust fund baby? It's not 5 million per child it's 5 million per estate.
With parents who own a home in NYC and one in Florida, your at least half way there just on property.

This number along with FDIC insurance should go up each year at the rate of inflation.

I'm not an accountant so forgive my ignorance, but I thought that the gift tax limited you to giving 13,000 a year to anyone, so how does one buy an apartment without incurring this gift tax? Obviously I don't understand the relationship between the estate tax and the gift tax.

dmf13 - I AM NOT AN ACCOUNTANT NOR AN ATTORNEY, however my understanding is that the only way to avoid using your lifetime exclusion when buying a home for a child is to either 1) lend the child the money to purchase (private mortgage) and charge, at a minimum, the prevailing AFR on some form of a note or 2) arrange some hybrid ownership structure where they can buy the parent's portion of equity from them over time. otherwise, the IRS views this sort of purchase as a "gift" and will impose the gift tax.

dmf13 -- the $13,000 is not included in the exemption. A person can give $13,000 per year to as many people has s/he likes, and it does not count towards the exemption. Any gift over the $13,000 per person per year starts chipping away at the exemption.

The one-time exemption, which used to be $1 million, was upped to $5 million for 2011 and 2012 only. So what this means is that Grandma can give $13,000 each to Tommy and Janie every single year. And now this year, Grandma can give a total of $5 million to Tommy and Janie combined (so that each gets $2.5 million).

At that point, the exemption is used up. Grandma can continue gifting $13,000 each year to each child, but Grandma needs to die before any "big bucks" go to Tommy and Janie. That's when the estate tax kicks in, which has been hovering around 50%, give or take. That $5 million gifted to Tommy and Janie was "exempted", and is therefore not subject to the gift tax.

For the first time, the gift tax and the estate tax are equal. But again, only for 2011 and 2012. After that, who knows? Congress will need to revisit or it will revert back to the $1 million exemption.

Not that Im a fan of taxes but 5 million is a tad on the high side. So is 50%.

Suggestion to Congress.
Make the one time 3 million. (raising each year at the rate of inflation)
Tax 20%.
That's fair.

My father taught me young the importance of life insurance.
The amounts for life insurance should be primarily to cover the costs of estate taxes so as not to totally disrupt business and real estate ownership, forcing sales at inopportune times.