I am married to the love of my life and we are currently planning our forever home. It sounds great, and it was — until my new in-laws made their grand entrance. They are currently dangling the one gift that they know will change our lives — land — over our heads. They are offering us 20 acres of property in a trust, and say that a piece can be gifted to us without financial penalty. It’s free for us to build on. Is this too good to be true?
It will be a merry Christmas, after all! Or will it?
Your question has two parts, and both are related to tax: Can your in-laws give you such a gift without paying gift tax? And will it come with no emotional gift tax — that is, without any strings attached? The former question is easier to answer than the latter.
A qualified personal residence trust (QPRT) requires no gift or estate taxes to be paid. The lifetime federal estate-tax exemption is $11.58 million, or $23.16 million for 2020. Selling a home or land owned by such a trust can be tricky, however.
“You can use all or part of your gift and estate tax exemption during your lifetime,” according to Charles Schwab SCHW, -0.54%. “Any portion left over can then be used by your heirs to reduce or eliminate estate taxes that might otherwise be owed.”
MarketWatch’s Tax Guy has another solution: Wait until your in-laws die. “Why? Even if you pay a market-rate rent to your child, the IRS might argue the home’s full date-of-death value still belongs in your taxable estate.” One more thought: What happens if you divorce?
There may be other, better options for your in-laws to gift this land to you, especially if you want to build your dream home on it. Do everything by the book and make sure you have a tax and/or an estate lawyer run through all the options.
The second part of your question has many variables: your relationship with your in-laws, how controlling (or not) they may be, and whether or not you opt for an irrevocable trust to make it more difficult to change their minds on a whim, to name a few.
The success of such a gift also depends on your own ability to receive it. Will you buckle under the weight of this gift from your in-laws for the rest of your and their lives? Will it alter the balance of power in your relationship?
Assuming you are fortunate enough to have a job and get a mortgage, you get a mortgage. Unemployment is at a 50-year low and we are experiencing a 10-year bull market. The Dow Jones Industrial Average DJIA, +0.27% is up 23% this year; the S&P 500 SPX, +0.29% is up 29%.
Whatever your financial situation, such a “gift tax” (not to be mixed up with the gift tax from the Internal Revenue Service) could make your in-laws feel like they have a hold over you. Giving assets to family members can also create jealousy among those who like to keep score.
Whatever you decide, be 100% sure before unwrapping this gift.
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Hello there, MarketWatchers. Check out the Moneyist private Facebook FB, +0.41% group where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas: inheritance, wills, divorce, tipping, gifting. I often talk to lawyers, accountants, financial advisers and other experts, in addition to offering my own thoughts. I receive more letters than I could ever answer, so I’ll be bringing all of that guidance — including some you might not see in these columns — to this group. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.