Early this year, I gave my niece $19,000 to help her buy a car. She called me the other day and said she was told she has to pay income tax on this money. She also asked me for money to pay the tax. Is this true? Should I give her more money? Will she have to pay tax on that too?
David Dear David,
Either your niece is uninformed, or she is fishing for more money from the Bank of Uncle David. She doesn’t have to pay income tax on a gift or even an inheritance unless it’s tax-deferred money, such as the accrued interest in a U.S. savings bond, or a tax-deferred retirement account inherited upon your death. However, in theory, you could have to pay federal gift tax for having made the gift.
The gift tax and the federal estate tax are related. In fact, they are the same tax, called the Federal Gift & Estate Tax. This is a tax on both gifts you make during your lifetime and on what you own upon your death. The good news is that you, and most people, do not have to be concerned about Gift & Estate Tax for two reasons.
First, there’s an annual gift tax exclusion in the amount of $16,000 for 2022 (up from $15,000 in 2021). This exemption allows you to give away $16,000 to as many people as you want, each and every year, and neither you nor they will have to report the gift to the IRS. You could stand at the entrance to town and pass out $16,000 checks to everyone who enters. This would be entirely tax-free and would also boost tourism.
Because you gave your niece $19,000, you have exceeded the limit. This means you owe gift tax on $3,000. Fortunately, you do not have to write a check to the IRS. Your gift tax liability will be “paid” by your federal gift & estate tax unified credit, which covers the Gift & Estate Tax on the first $12,060,000 you gift above the $16,000 annual gift tax exemption upon your death.
You are supposed to report this gift on IRS Form 709, attached to your federal income tax return. Then, your unified credit exemption will drop by $3,000 to only $12,057,000. Unless you are wealthier than that, relax and don’t worry about it.
Len & Rosie Dear Len & Rosie,
A good friend of mine died last month, and I have just discovered that he named me as his executor. I haven’t the faintest idea what I’m supposed to do. I’m not an attorney, and I don’t know if I want to devote the time to it. I’m not even sure that I want to be executor. My friend is survived by his four adult children, two sons and two daughters. They have never gotten along with each other. I just know that they are going to start fighting over their father’s estate, which is worth over $500,000. Just last week they were arguing over who would get his stereo and television. What is an executor, what does the job pay, and what can I do if I don’t want to do it?
An “executor” is a person nominated in a will, and appointed by the court, to oversee the distribution of a decedent’s probate estate. The good news is that if you take the job, you get paid, and paid well. The probate executor (or administrator) gets paid the same fee as the probate attorney — in your case, a $13,000 statutory fee for an estate with a gross value (before debts are subtracted) of $500,000. If the estate is worth $1,000,000, you’ll get paid $23,000.
It will be your responsibility to gather the assets of your friend’s estate. You will need to publish a notice to creditors to ensure that those your friend owed money to have the opportunity to present their claims for payment. All of the assets in the estate have to be inventoried, itemized, and accounted for before the court will order you to distribute the estate in the manner provided for by your friend’s will. Your friend may have a final income tax return due next April 15. The estate will also have to file an income tax return if it earns more than $600 of income during the course of administration.
All of this is more or less routine, and most of the heavy lifting will be done by the lawyer you hire to probate the estate. The difficulty will come in if your friend’s children fight with one another over every little thing. Your friend’s possessions of sentimental value should be divided equitably among his children and, hopefully, they can do this on their own. If they are fighting over the television, there’s an easy solution: Sell it to the highest bidder, or put it up for sale in an estate sale.
If you don’t like the idea of having to put up with your friend’s children, you can simply refuse to do it. They can’t force you to be the executor. If you feel your friend’s children are going to fight over the estate like dogs struggling over a bone, then the $13,000 fee may not be worth the hassle. If you do not want the job, the next executor named in the will should do it, or your friend’s children will fight for the privilege of being executor.
Len & Rosie