Tax Question: We want to give my parents some money but don't want them to pay taxes. What is the best way.

Question

We want to give both set of parents a large $ gift to hold for us. We are going to law school next year and want to utilize as much of the aid as possible. We have three children so we need to have money to live on also, how can we give this money to my parents to hold for us and get it back when we need it. And is this legal?

Answer 1

What you are describing is NOT a gift. A gift has no strings attached to it; it immediately becomes the property of the recipient with no expectation of anything in return.

What it sounds like is loan fraud actually. You're trying to hide assets (cash) in order to qualify for financial aid that you are not eligible for due to your income or overall financial status. That is a CRIME. And if it's Federal aid you're seeking, it's a FEDERAL crime and a FELONY at that. You'll learn that in law school though -- the only thing left to discover will be if you attend it from behind bars or on the outside.

Given that what you are asking is obviously fraud -- and if some unseen face on Yahoo! Answers can figure it out, so can the financial aid folks -- I'll skip my usual trieste on Gift Taxes since we're not talking about a gift anyway.

I will add that the best treatment for that money would be that it would be considered as a loan to your parents. Since it is at a below market rate, the IRS would consider the value of the interest foregone by them as ordinary income to them. If you handed them $100k for "safe keeping" they'd be liable for taxes on about $8,000, the FMV of the money at current interest rates. That would be on top of any action taken against you for student loan or student aid fraud.

Answer 2

This isn't a gift, it is a loan and as long as you take the money back is not taxable to anyone!

Gifts are given with NO expectation of the gifter getting anything back. What you are proposing sounds more like you are using the parents as a temporary bank. There are no tax consequences.

And, in the US anyway, the gift is taxable to the GIVER not the RECEIVER. Doesn't make sense but that is the way it works.

Answer 3

I agree with Bostonian, except that since you would be lending the money to your parents, you would be liable for the taxes on the assumed interest, since normally they would be paying you interest and you would have the interest income.