Cash Gifting
Cash gifting is a "tax shelter" method often suggested by accountants or estate attorneys and is approved by the IRS under Tax Code Title 26, Sections 2501-2504 and 2511.
The traditional use of cash gifting is to reduce estate sizes, which in turn reduces estate tax burdens on heirs after death. Each year, you are legally allowed to "gift" up to $12,000 USD to an unlimited number of individuals. Gift recipients are not required to declare this receipt as income or revenue and the gift is non-taxable for either party.
However, in order to LEGITIMATELY QUALIFY AS A CASH GIFT under IRS rules, the gift MUST BE GIVEN WITHOUT ANY RECIPROCATION WHATSOEVER. This restriction has given birth to many creative "cash gifting systems" used for building non-taxable incomes and revenues. It's also what separates the method from other schemes like ponzis or pyramids.
IRS CASH GIFTING RULES
Following content is take directly from IRS.GOV
TITLE 26—INTERNAL REVENUE
CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 25_GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954—Table of Contents
Sec. 25.2207A-1 Right of recovery of gift taxes in the case of certain marital deduction property.
(a) In general. If an individual is treated as transferring an
interest in property by reason of section 2519, the individual or the
individual's estate is entitled to recover from the person receiving the
property (as defined in paragraph (e) of this section) the amount of
gift tax attributable to that property. The value of property to which
this paragraph (a) applies is the value of all interests in the property
other than the qualifying income interest. There is no right of recovery
from any person for the property received by that person for which a
deduction was allowed from the total amount of gifts, if no Federal gift
tax is attributable to the property. The right of recovery arises at the
time the Federal gift tax is actually paid by the transferor subject to
section 2519.
(b) Failure of a person to exercise the right of recovery. (1) The
failure of a person to exercise a right of recovery provided by section
2207A(b) upon a lifetime transfer subject to section 2519 is treated as
a transfer for Federal gift tax purposes of the unrecovered amounts to
the person(s) from whom the recovery could have been obtained. See Sec.
25.2511-1. The transfer is considered to be made when the right to
recovery is no longer enforceable under applicable law and is treated as
a gift even if recovery is impossible. A delay in the exercise of the
right of recovery without payment of sufficient interest is a below-
market loan. Section 1.7872-5T of this chapter describes factors that
are used to determine, based on the facts and circumstances of a
particular case, whether a loan otherwise subject to imputation under
section 7872 (relating to the treatment of below-market loans) is
exempted from its provisions.
(2) The transferor subject to section 2519 may execute a written
waiver of the right of recovery arising under section 2207A before that
right of recovery becomes unenforceable. If a waiver is executed, the
transfer of the unrecovered amounts by the transferor is considered to
be made on the later of—
(i) The date of the valid and irrevocable waiver rendering the right
of recovery no longer enforceable; or
(ii) The date of the payment of the tax by the transferor.
(c) Amount of gift tax attributable to all properties. The amount of
Federal gift tax attributable to all properties includible in the total
amount of gifts under section 2519 made during the calendar year is the
amount by which the total Federal gift tax for the calendar year
(including penalties and interest attributable to the tax) under chapter
12 of the Internal Revenue Code which
[[Page 546]]
has been paid, exceeds the total Federal gift tax for the calendar year
(including penalties and interest attributable to the tax) under chapter
12 of the Internal Revenue Code which would have been paid if the value
of the properties includible in the total amount of gifts by reason of
section 2519 had not been included.
(d) Amount of gift tax attributable to a particular property. A
person's right of recovery with respect to a particular property is an
amount equal to the amount determined in paragraph (c) of this section
multiplied by a fraction. The numerator of the fraction is the value of
the particular property included in the total amount of gifts made
during the calendar year by reason of section 2519, less any deduction
allowed with respect to the property. The denominator of the fraction is
the total value of all properties included in the total amount of gifts
made during the calendar year by reason of section 2519, less any
deductions allowed with respect to those properties.
(e) Person receiving the property. If the property is in a trust at
the time of the transfer, the person receiving the property is the
trustee, and any person who has received a distribution of the property
prior to the expiration of the right of recovery if the property does
not remain in trust. This paragraph (e) does not affect the right, if
any, under local law, of any person with an interest in property to
reimbursement or contribution from another person with an interest in
the property.
(f) Example. The following example illustrates the application of
paragraphs (a) through (e) of this section.
Example. D created an inter vivos trust during 1994 with certain
income producing assets valued at $1,000,000. The trust provides that
all income is payable to D's wife, S, for S's life, with the remainder
at S's death to be divided equally among their four children. In
computing taxable gifts during calendar year 1994, D deducted, pursuant
to section 2523(f), $1,000,000 from the total amount of gifts made. In
addition, assume that S received no other transfers from D and that S
made a gift during 1996 of the entire life interest to one of the
children, at which time the value of trust assets was $1,080,000 and the
value of S's life interest was $400,000. Although the entire value of
the trust assets ($1,080,000) is, pursuant to sections 2511 and 2519,
included in the total amount of S's gifts for calendar year 1996, S is
only entitled to reimbursement for the Federal gift tax attributable to
the value of the remainder interest, that is, the Federal gift tax
attributable to $680,000 ($1,080,000 less $400,000). The Federal gift
tax attributable to $680,000 is equal to the amount by which the total
Federal gift tax (including penalties and interest) paid for the
calendar year exceeds the federal gift tax (including penalties and
interest) that would have been paid if the total amount of gifts during
1996 had been reduced by $680,000. That amount of tax may be recovered
by S from the trust.
[T.D. 8522, 59 FR 9655, Mar. 1, 1994, as amended by T.D. 9077, 68 FR
42595, July 18, 2003]
See Further Cash Gifting Tax Law
External Links
1. Cash Gifting Explained
2. IRS.gov
