Taxes and Family Conflict: Part II
Well, it happened again. In working with a two-generational family, the issue of taxes and personal values came up. Although there was a little bit of conflict, the real issue was confusion: â€œWhat should I do?â€ And the confusion was caused by an advisorâ€™s sole focus on reducing taxes, rather than hearing the real desire of the client.
The matriarch is a very kind, gentle woman and she is also very generous. She and her deceased husband are classic examples of the â€œmillionaire next doorâ€ (see Thomas Stanleyâ€™s excellent book of the same name). They were hard workers, frugal, lived simply, saved, and were wise investors. As a result, she has more than enough money for her needs and is able to share with others.
Because of some circumstances in the extended family (her children and their families), she decided to give a significant monetary gift to each of them. However, it was above and beyond their annual exclusion ($22,000 to each couple), and also went beyond her lifetime gifting exclusion (she had used up much of it previously). As a result, gift taxes were going to be paid on the gifts.
The question that came up was this. Depending on how the gift was structured and recorded with the IRS, it impacted whether Mrs. Y (the giver) paid the gift taxes or whether her children (the recipients) paid the taxes. And to complicate things, if she paid the taxes, the government would get approximately $30,000 more than if her children paid the taxes out of the gift they received.
Because of this last fact â€“ that the family would be paying $30,000 more in taxes if Mrs. Y paid the gift tax â€“ her attorney told her that the kids should pay the taxes. This made sense from the overall view of the familyâ€™s estate. However, Mrs. Y was confused. She wanted to share some money with her family, and yet by having them pay the taxes, it reduced the amount they actually would receive.
So Mrs. Y and I talked. After hearing the facts about the situation, and her resulting confusion, I told her, â€œThis is really not just a financial decision. It is a values decision â€“ about what is most important to you. Is it more important to you to avoid paying more to â€˜Uncle Samâ€™ or is it more important to you to get more of the money to your children right now? There is not necessarily a â€˜rightâ€™ or â€˜wrongâ€™ answer to this decision â€“ it is more about what you want to accomplish.â€
Mrs Y immediately affirmed, that in this situation, it was more important to her to get the maximum amount to her children, even if it meant paying more taxes. She then smiled and said â€œThanksâ€, and communicated her desires (and decision) to her attorney and accountant.