My uncle died leaving a $250,000 Annuity to his sister (my mother) with the intent to have it split between her 6 children. The insurance company withheld 20% for the Feds. The balance went into my mother's account. She wants to divide this between her 6 children. An inheritance tax would not apply. Can she do this without having to incur a gift tax?
1 Answer from Attorneys
The federal gift tax (there is no Illinois gift tax) is triggered by the transfer of greater than $14,000 to a recipient (the first $14,000 is excluded). However, until the total gifts made by a donor exceed $5,000,000, there is no tax payable. The first $5.000,000 of lifetime transfers is not taxed. So, while in theory there is a gift, and a gift tax return required to be filed, there will be no tax payable until the total gifts exceed the $5,000,000 limit. Income tax is more of an issue in your scenario, if mom is gifting the amount, who will pay the income tax on the distribution? 20% may have been withheld, but the actual rate of tax on the distribution may be greater. If mom makes her gift and gets stuck with a large tax bill, will the six children give back to mom an adequate amount to cover the taxes?