Wealth Shifting Scheme

[Snaggletooth]

Elderly mom and dad have perhaps millions in cash. They have two sons, each of them is a homebuilder.

Mom and Dad want a way for the sons to have their wealth without gift tax. So they go around the countryside buying large acreage tracts. In 2009 alone they bought $700,000 in land. They proceeded to "sell" the land to their sons for cost. The sons will develop the land into housing over the next 6-7 years, and over the course of this period they will pay as they sell the houses.

I've insisted the parents impute interest (and collect same) of at 3.5%. The parents are not interested in collecting this, but must do so to comply with the tax laws. Sons are agreeable to the interest.

There seems to be holes in this wealth-shifting scheme. 1)If the sons pay off the amount in 6-7 years and the parents live this long, then the cash is right back where it started. 2)If the parents die first, does not the unpaid debt represent estate value? 3)If the parents die first, the interest becomes income in respect of decedent?

Don't blame me. Their brilliant lawyers came up with this scheme. What say ye??

[erchess]

Hey Snags

Does the IRS care whether the interest is paid as long as it is imputed reported and taxed on the Parents' return?

How did you determine your rate of interest? Your figure strikes me as low but I have no idea what an arm's length transaction with a bank would yield for a builder with good credit and I have no idea who I would ask unless it was a friendly employee of the CU where I bank.

All your observations, which add up to "This is foolishness." seem right on target to me. As I understand it the parents wish for their considerable wealth to pass to their children with minimal tax whenever they die. The obvious way to do that is for each parent each year to gift the maximum allowable with no gift tax to each child. Other than that the estate tax payable in the year of the second death will be due. Any student who has finished the second semester of college accounting can come up with that much. I would wonder if there is not a way for the parents to greatly benefit these builders by buying BONDS of the businesses then leaving the BONDS to a charity rather than to the sons. The kids would get the immediate use of the money in return for interest payments and the repayment of principal could be put so far into the future that it is the concern of whomever inherits the businesses. The thing is that the taxing agencies always seem to be very patient like the cop in Les Miserables, confident of always sooner or later catching the criminal or collecting the tax..

[Burke]

[QUOTE=Snaggletooth;91987]

1) If the sons pay off the amount in 6-7 years and the parents live this long, then the cash is right back where it started.
2) If the parents die first, does not the unpaid debt represent estate value?
3) If the parents die first, the interest becomes income in respect of decedent?QUOTE]

IMHO,
1) yes.
2) yes.
3) yes.

What does the lawyer say?

[Snaggletooth]

Dunno

Burke, dunno. He didn't consult with me and neither did the parents.

His is the Voice of God, and light of wisdom shines from him everywhere
he goes -- I'm just a dumb accountant. What do I know?