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Helping Parents While Avoiding Taxes

Baby boomers who’ve done well in the world can help out mom and dad without owing Uncle Sam.

A couple can give up to $52,000 to a set of parents free of gift tax every year. The law allows a taxpayer to give up to $13,000 a year to as many individuals as he wants, so the child and spouse can each give $13,000 to each of the parents.

And as for medical costs, a child can pay an unlimited amount in medical expenses without gift tax, as long as the payments are made directly to the provider. That is the case for anyone–no trusts or other estate plans necessary.

Making a home available to a parent is a popular idea, says Jonathan M. Forster, national chairman of wealth management in the McLean, Va., office of law firm Greenberg Traurig.

A child may lend a parent money to, say, help buy a new house, expecting to get the money back when the old house sells. Paying too much money back to the child can cut off Medicaid, though, if the government thinks the parent was simply trying to get assets below a certain level to make the qualifying asset level for Medicaid.

If the child plans to own the home, though, he needs to be clear on what is and isn’t going to be considered rent. Be sure the present “is not costing you gift taxes,” says Forster. Any will or trust should be sure to name the parents as beneficiaries of the home specifically and direct what happens at the child’s death, he adds.

If you’re able to set aside even more, you may want to consider setting up a trust for your parents. Deborah Cox, vice president and wealth adviser at JPMorgan Private Bank, is helping a private-equity executive in Dallas find the best way to move his parents closer to him from around the Chicago area, where he grew up.

The parents, already downsized to a modest condo, don’t have the money to make the move on their own. So Cox is helping the son set up a trust for around $10 million, an amount aimed at taking advantage of the new estate tax exemption. (Congress set the estate tax ceiling at $5 million per individual at the end of last year, so couples can give up to $10 million free of the estate tax.)

The trust, which will provide for the man’s children, grandchildren and parents, will buy and maintain a small house where the parents will live. Because the trust purchases it, the man won’t owe gift tax on the home even though he is, in effect, giving his folks a place to live. The generation-skipping trust being used in this case is also often used by an older generation to care for grandkids.


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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.