Help your son's widow, don't fret the gift tax

And a spouse needs to be sure she doesn't risk being disinherited

Dollars & Sense

March 03, 2002|By Liz Pulliam Weston | Liz Pulliam Weston,SPECIAL TO THE SUN

My son died 18 months ago. He left behind his fiancee and twin girls. My husband and I are separated and each received $25,000 from our son's life insurance policy. We are both very close to his fiancee, who has asked whether she could have $10,000 from the life insurance proceeds. She would use it to have new siding put on the house, which desperately needs it. I have no problem with helping her, but I wonder what tax implications I will have. Earlier this year I gave her $5,000 toward the purchase of a new car.

Don't let tax worries prevent you from helping your grandchildren and their mother. Unless you plan to give away more than $1 million in your lifetime, you won't face any tax implications for your gifts.

You're allowed to give $11,000 a year to anyone you choose without having to file a gift tax return.

You don't actually owe any tax until your gifts, above that $11,000 threshold, total $1 million per person.

In other words, your $10,000 gift, added to the $5,000 you've already given her, would require the filing of a gift tax return with the IRS, because your total gifts for this year would exceed $11,000. But only $4,000 would be subtracted from your $1 million lifetime limit.

If you don't want to bother with a gift tax return, you might give $6,000 and ask your husband to chip in the rest.

You also might consider giving her the rest of the money, either now or over the next few years. Chances are this policy was purchased for your son by his employer, and your son never got around to changing the beneficiaries when he started a family. Unfortunately, this happens far too often.

People marry, divorce or have children but forget to update the beneficiaries on their insurance policies and retirement accounts.

You're not required to give up the money, of course, but a single mother with two children certainly could use all the help you're willing to give.

What advice do you have for someone whose spouse brought investments into the marriage that have doubled in the last 10 years, but are still in the spouse's name alone? My spouse's children are named as the only beneficiaries on the accounts, which include annuities and life insurance policies. Because this amount of money is large, am I entitled to any portion of it upon death or divorce?

The answer depends on the type of accounts and where you live.

In community property states, such as California, it matters who had what when you got married. Assets acquired and income earned during marriage are considered to be owned equally by both spouses. Assets owned by one spouse before the marriage, or received by gift or inheritance during marriage, usually are considered separate property.

There are exceptions, of course. If you commingle assets - depositing your inheritance into your joint checking account, for example - your separate property could become community property. Also, retirement account contributions and earnings during the marriage are considered community property even if the spouse had the account before marriage. In two community property states, Texas and Idaho, income earned from separate property - such as investment dividends - also is considered community property.

Had enough yet? Sorry, there's more. Most states don't have community property laws. They operate by common law, which holds that the spouse who earns the money or brings the assets into a marriage doesn't have to share - at least during life.

At death, however, the surviving spouse typically has the right to take one-third to one-half of the estate, regardless of who owned what - and often regardless of what the dead spouse's wishes were.

You'll probably want to chat with an estate planning attorney to find out exactly what the rules are in your state and how they affect you. If you're in a common law state, your spouse would have a tough time disinheriting you, especially without your consent. You might be in a somewhat more precarious situation in a community property state, but a thorough review of your situation might turn up ways to mitigate the damage.

Gather as much information as you can about what you and your spouse own and owe. The more financial data you have, the better you can plan for your future.

A waitress we know recently received her W-2 wage statement. The box for tips had been filled in by her employer and is substantially more than her actual tips for the year. Fortunately, she keeps a log of her daily tips. How can she challenge this with her employer as well as prove to the IRS that her tips were less than her employer reported?

Because she kept good records, your waitress friend can report the tips she actually earned and not worry about what her employer reported.

Many restaurants and bars are required to allocate tips, equaling about 8 percent of sales, to their employees - whether or not the servers actually made that much. Smart waiters and waitresses do what your friend did, and keep a daily log. That should be enough to prove her figures are right, even if challenged by the IRS.

Liz Pulliam Weston is a columnist for the Los Angeles Times, a Tribune Publishing newspaper.

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