How can I minimize tax payments on a $100,000 gift?

My grandmother-in-law is planning to leave her estate to my mother-in-law in the amount of approximately $1 million dollars. My mother-in-law, in turn, wants to give $100,000 of that to my wife and me. I make approximately $64,000 yearly. My wife does not work.

I would like to use the money to help me change careers and get through two years of graduate school.

What kind of tax would I have to pay on the $100,000? Gift or inheritance? How can I minimize the tax?

Question:

Any gift over $10,000 is subject to the gift tax so Mom's gift of $100,000 to you would be exposed to that tax.

What she’ll have to do if she just presents you with the money in a lump sum: File a gift tax return, Form 709. No tax will be due if her lifetime gifts are less than $675,000. (She gets to give away up to $10,000 a year tax-free.) When she dies, the amount she can leave tax free will be reduced by those taxable gifts she’s made during her lifetime.

But, giving the $100,000 to you as a taxable gift isn’t the best approach. Here are three easy ways for Mom to to get around the gift tax:

1. Mom could pay for college tuition and expenses -- those aren't gifts, so they aren't subject to these rules.

2. Mom can give each of you $10,000 a year for the next five years. Gifts of this size or less aren’t taxable.

3. Mom can ask Grandma to change her will and leave $100,000 to you. (Grandma’s estate is taxable to the extent that it exceeds $675,000, and there’s no getting around that. But at least if she leaves money directly to you, rather than to your mom who passes it along to you, there won’t be an additional gift tax at your mother’s level.).

There are more complicated maneuvers as well. If you still feel uncertain, consider talking to an estate-planning accountant about your particular situation.

--Ginita Wall, C.P.A., C.F.P., Retire Rich Expert

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