A mother dies. The community sets up a race and $20k is raised and given the the children. Is the money taxed?

Question

The people who put the race together did it under the name of an LLC but not under a 501c3. The check was written to the father of the children.

Answer 1

This sounds like a gift to me and therefore not taxable. As long as the Father preformed no services for the money and gave nothing of value for the money. By the same token the prople who gave the money will not get a tax deduction for their gifts.

Answer 2

These are usually very tricky. Since its an LLC, the income may still be tax-free, however, the issue becomes what is the money that is given to the father considered, is it income? If so, he may face personal taxes on it. Definitely a complicated issue with no easy answer, probably has more to do with the actual distribution and use of the cash as opposed to the entity that received it.

Answer 3

See a CPA on this one. There might be a way for the donations to be considered as gifts to the family (non-taxable). Running it through the LLC might make that tougher though, so it might end up taxable, and/or there might be tax implications for the LLC. But talk to a CPA.

The donations are not tax-deductible in any case, either by the original donors or by the LLC.

Answer 4

Yes, it is taxable. The husband/children are not a non-profit and neither was the group that raised it.

If he hasn't cashed the check yet, he may be able to set up a trust for the kids and have it directly deposited into their trust. I believe in that case, it won't be taxable until they pull it out of the trust. So, would be taxable at their tax rate at the time they pull it out (which would most likely be less than dad's current tax rate). However, having a trust can hurt their ability to get any type of financial-need-based scholarships for college later on.