I am married to the love of my life and we are currently planning our forever home. It sounds great, and it was — until my new in-laws made their grand entrance. They are currently dangling the one gift that they know will change our lives — land — over our heads. They are offering us 20 acres of property in a trust, and say that a piece can be gifted to us without financial penalty. It’s free for us to build on. Is this too good to be true?
It will be a merry Christmas, after all! Or will it?
Your question has two parts, and both are related to tax: Can your in-laws give you such a gift without paying gift tax? And will it come with no emotional gift tax — that is, without any strings attached? The former question is easier to answer than the latter.
A qualified personal residence trust (QPRT) requires no gift or estate taxes to be paid. The lifetime federal estate-tax exemption is $11.58 million, or $23.16 million for 2020. Selling a home or land owned by such a trust can be tricky, however.
“You can use all or part of your gift and estate tax exemption during your lifetime,” according to Charles Schwab
“Any portion left over can then be used by your heirs to reduce or eliminate estate taxes that might otherwise be owed.”
MarketWatch’s Tax Guy has another solution: Wait until your in-laws die. “Why? Even if you pay a market-rate rent to your child, the IRS might argue the home’s full date-of-death value still belongs in your taxable estate.” One more thought: What happens if you divorce?
There may be other, better options for your in-laws to gift this land to you, especially if you want to build your dream home on it. Do everything by the book and make sure you have a tax and/or an estate lawyer run through all the options.
The second part of your question has many variables: your relationship with your in-laws, how controlling (or not) they may be, and whether or not you opt for an irrevocable trust to make it more difficult to change their minds on a whim, to name a few.
The success of such a gift also depends on your own ability to receive it. Will you buckle under the weight of this gift from your in-laws for the rest of your and their lives? Will it alter the balance of power in your relationship?
Such a “gift tax” (not to be mixed up with the gift tax from the Internal Revenue Service) could make your in-laws feel like they have a hold over you. Giving assets to family members can also create jealousy among those who like to keep score.
Whatever you decide, be 100% sure before unwrapping this gift.
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