Looking the Gift (Tax) Horse in the Mouth: The Story of Rosalyn and Sarah

August 24, 2021
Categories
Living Trusts

Managing large sums of money and property ownership can be difficult. In the case of sisters Rosalyn and Sarah, a divorce settlement turned into a difficult legal situation before an irrevocable trust arrangement saved the day. 

Managing large sums of money and property ownership can be difficult. In the case of sisters Rosalyn and Sarah, a divorce settlement turned into a difficult legal situation before an irrevocable trust arrangement saved the day. 

The story of Rosalyn and Sarah

Rosalyn and her husband were together 30 years before eventually getting a divorce. Throughout the marriage, Rosalyn had stayed home to raise her children and her ex-husband was the breadwinner. Additionally, the ex-husband had done all of the money management, so Rosalyn herself was not particularly money-savvy. Once Rosalyn and her husband divorced, the courts awarded Rosalyn a considerably large sum of money: $400,000. 

On the other hand, Rosalyn's younger sister Sarah never married. Sarah lived with mild autism and thus was never able to work full-time. Rosalyn decided to use some of the money from the divorce to help Sarah purchase a condo. The condo ended up costing $350,000 and Sarah contributed $100,000 to the purchase through her third-party special needs trust fund. They were able to pay off the house in full, which gave Sarah a level of housing security she was not able to hold before. 

The problem 

Because Rosalyn was not especially financially savvy, she allowed Sarah to put the condominium in her name. Sarah had created a will stating that after her death, the condo would either go to Rosalyn or, in the event Rosalyn passed first, to her estate.

However, due to Sarah's mild autism, Rosalyn became concerned that Sarah might choose to change her will. Rosalyn did not think that this situation was likely since she and Sarah had always been close, but the possibility of an unscrupulous third-party taking advantage of Sarah existed. Rosalyn wanted to ensure that the property would go to her children eventually. 

Additionally, Rosalyn became concerned about the possibility of a gift tax existing, given that she essentially gave Sarah $250,000 and never paid taxes on it. 

The solution 

Throughout all of this, Sarah and Rosalyn maintained a very positive relationship so they were able to amicably resolve the issue. They decided to use an irrevocable trust to protect everybody’s interests. By creating ab irrevocable trust, Sarah would be allowed to continue living in the condo until death. Upon death, the trust immediately bequeathed the property to Rosalyn or Rosalyn’s estate. Since the trust is irrevocable, nobody could make any changes to it.

In return to Sarah agreeing to the irrevocable trust, Rosalyn paid Sarah the $100,000 that Sarah had invested back to her. By doing so, the house became Rosalyn’s and Sarah could enjoy the security the liquid cash offered.  

Because of all this, Rosalyn was able to learn more about gift tax. Gift tax is a federal tax applied to an individual giving anything of value to another person. As of 2020, Rosalyn discovered that she could leave over 11 million dollars tax-free, so she was free and clear of the gift tax. Instead, she was able to use Form 709.

The end lesson

There are multiple ways to manage large cash influxes and property ownership. What works for one family may not work for another. Contact us today at AmeriEstate to learn about the unique solutions we have for your financial dilemmas.