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Gifting money and getting it back

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  • Gifting money and getting it back

    I had a question about a scenario that may not apply to all of you. It may apply to those who are first generation immigrants with family back home in their native countries. I am curious if anyone here has any ideas or comments.

    Sometime ago a close relative suggested:
    "Gift post-tax money from USA to a relative in your native country (eg, father who lives in india/china), the receiver invests the money in home country under his name, pays taxes (takes advantage of good interest rates at banks, low capital-gain taxes in equities and good real estate returns) and gifts it back to you after a few years. You do not pay any taxes on the gift as taxes were already payed in the other country."

    Lets assume for the sake of discussion the relative is trustworthy and wont run away with your money.

    I am aware of the annual gift exclusion amount below 14k and life time exemption of estate and gift taxes below 5.4 million. Also IRS form 3520 needs to be filed when accepting a gift of >100K $ from a foreign person. However these are just IRS reporting requirements and do not imply any taxation.

    Can it be considered a "gift" at the first place if you get "gift" from the same person in the future? If the answer is no, what if the money changes hands in the native country and comes back to you as a gift from someone else? What are the other issues with such transactions?


  • #2
    I think this is exactly the type of stuff where the step transaction doctrine is meant to apply.

    That's not to say that you wouldn't get away with doing it, though.   I have no idea about how likely that is, but I do think that what you've explained is technically illegal.


    • #3
      Thanks AR. Will need to read about Step transaction doctrine. I posted the same on Bogleheads forums and got similar reponses.


      • #4
        Thanks AR. Will need to read about Step transaction doctrine. I posted the same on Bogleheads forums and got similar responses.


        • #5
          Step transaction comes to mind for me, also. But why wouldn't you just structure the transaction as a loan? That's what you're really doing, right? I see no problem with repayment plus market rate interest. And then your relative could make an additional gift if he/she so chose.

          Of course, there is always a risk: lawsuit, death, divorce, poor investment. You may trust the borrower 100% but there is no guarantee that you'll get your $$ back.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


          • #6
            I thought of the loan, but he would have to pay tax on the interest and tax is what he is trying to avoid.

            Of course it is possible that he sets the interest rate at the lowest possible level that will satisfy the IRS that it is a legitimate loan (these days less than 1% would probably fly) and then have the foreign family member give him the rest of profits as a gift.

            I'm not a tax lawyer, but if this is all planned out in advance, then I think he is technically in step transaction doctrine territory.  On the other hand, I think it would be even more difficult for the IRS to prove wrong doing on his part if it were set up this way.  That may be worth whatever tax on loan interest he has to pay.



            • #7
              Of course, he is trying to avoid taxation, along with the rest of us. That does not mean he is entitled to engage in a sham transaction with our blessing (albeit, worth what he pays for it).

              I am not nearly as concerned about step trx with the loan. As for interest to charge, all he has to do is comply with the IRS AFR (Applicable Federal Rate) schedule, published monthly. He does not get to randomly set the rate by what "will satisfy the IRS" . AFR rates are quite reasonable and we use them for all loans clients make to/from their businesses of > $10k and for personal loans.

              As for the profits, a true gift must have no strings attached. The family member gets to decide if, when, and how much to gift the OP.

              I don't think it is worth all of the finagling and risk, but what goes on behind closed doors is not my business.
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


              • #8
                When I said that the rate needs to satisfy the IRS, I meant that he should look up what it is.  Obviously, he's not intended to just make up a number.

                Per your link, for a short term loan it's less than 1%, which is what I suggested and what it was last time I checked. I didn't feel like checking again when I made my post.

                There's almost certainly a step transaction issue even with the loan plan from beginning to end.  Assuming the plan is 1)make loan at lowest possible interest 2)receive loan re-payment 3)receive gift of profits in excess of loan interest.    It's the exact same plan as  1)Gift money 2)receive larger gift back.    I don't see how replacing the first gift with loan at a super low rate (which while IRS compliant, is at a much lower rate than what is available commercially) suddenly takes away the concern.  Of course, I'm definitely not a tax lawyer, so I'll admit that I could be mistaken.