I, as US non-resident, transferred some money from my US bank account into my wife’s and son’s US bank accounts. Some people say that it is classified as a gift and obligated for taxation, because we are aliens, not citizens. Well, citizens also pay gift taxes, but if the amount of gift is very huge (around 5 million dollars) I would like to know how to optimize this expense. Maybe I should file this transfer as a “family loan”?
Thank you in advance.
Assuming United States; rules may be wildly different elsewhere…
The "family loan" trick essentially lets you amortize a gift over multiple years of gift allowance and hopefully dodge gift tax, at the cost of having to pay income tax on the interest you must charge on the loan. The main advantage is that it lets you transfer all the money up front, rather than in $17,000-a-year-per-person-per-person chunks.
Let’s take the normal case first. Any one person can give any one person up to a specified amount (currently $17k, I believe,) without incurring gift tax. Note that this is counted per person, not per household; you and your spouse could each give $17k per year to each of your son and his spouse under this rule, adding up to $68k per year total.
The family loan dodge consists of making them a loan of the money at the mandated minimum interest rate to make it a legal loan (something like 0.3% APR last time I looked), setting the repayment schedule so their payments each year including interest come out to less than you can gift them with tax-free, and then making that gift by paying (yourself) those payments on their behalf. You do need to pay income tax on the portion of those payments that represents interest income, but at that low rate this is a minor cost for the convenience.
You’d also want to set up your will to cover what happens if you die with them still owing money on the loan. And this, I believe, is where you will really need expert advice if you go this route, to minimize the government’s cut at that time.
There may be better answers. If you are talking about this much money, you owe it to yourself to purchase expert advice from someone who has training and experience n this area, rather than taking free advice from the Internet that is likely to cost you much more in the long run. This is a situation where you can’t afford not to hire a pro. (For example, I have no idea how trusts might or might not fit your needs.)
Research & References:
– See more at: http://acallresources.com/blog/how-do-i-minimize-taxes-when-transferring-money-to-my-wife-and-child/#sthash.OtQR8SfX.dpuf