Consulting engagement

[strong silence]

This illustrates, for me, the risk of having a client who is a friend.   As a friend I was going to answer his question quickly then I realized that this is more complicated that initially it appears.  I often have this niggling thought that friends would be quicker to forgive me should I make a mistake.  And that assumption could be highly consequential if it is wrong.

The dollars are significant, and he is one of the wealthiest clients in my portfolio.

Would you require an engagement letter for this client question?  here is the client question:

The UK has an onerous second home tax called the Stamp Duty (it would be 22,000 pounds for us which is roughly $30,000). People with 2nd homes around here avoid this tax by putting their home in their kids' names. Our UK solicitor has confirmed that this is legal and acceptable. We are thinking about doing this ourselves and putting the new place in our (adult) son's name even though all the money would come from us. We are working through different outcomes from this scenario. If we were both to die, we are okay with our son simply owning the Scotland place. However, if we needed to sell for some reason, this is a little more complicated. Assuming we had his cooperation, does it sound feasible to have him gift the proceeds back to each of us over a period of years at the maximum allowable annual limit that avoids gift taxes? 

[BobKamman]

They don't call it Stamp Duty in Scotland, it's Land and Buildings Transaction Tax, but in either case 

• "Abusive Tax Avoidance": Note that if the entire purpose of your child buying a property is purely to avoid paying stamp duty (or LBTT in Scotland), this could be considered an "abusive tax avoidance arrangement".

Your friend is concerned about gift tax when the money comes back to him, but not when the house is given to the child in the first place?  My first question, though, would be if the child is married or ever plans to be.  And if so, who gets the house in the divorce? 

[strong silence]

Thank you, Bob.

Your friend is concerned about gift tax when the money comes back to him, but not when the house is given to the child in the first place?

I have explained to him about the gift from giving the house to the son. In my understanding, there will be no tax due but the lifetime exemption will be reduced.  I am pretty confident about this part of it.

And if so, who gets the house in the divorce? 

This illustrates quite well the law of unintended consequences.  He could pay the tax now, own the home, then leave the house per his wishes in a trust.  He could avoid the tax and the let problem be someone else's to deal with after he passes.  Despite being a newly wed to a hot woman, he is prudent, and sensible and will make a thoughtful decision. 

He has a second son, more bright than the other. I might ask if he has considered letting the two sons own it.

Abusive tax schemes are an issue.  What are the audit rates?  What is abusive?  Is the penalty a huge consideration.  I don't have time to research these questions.

[sjrcpa]

"I don't have time to research these questions." Then it sounds like you don't have time to do the project.

Note: Is it really a gift if given with the stipulation that son will give it, or money's worth, back?

[Strongsilence-CPA]

No, if there is such a stipulation then it is an incomplete gift and not taxable.

Per 26 CFR § 25.2511-1

per CCH: A gift is incomplete if the donor retains the right to retake beneficial ownership of the property in himself or herself. The gift is complete if the donor only retains the power to change the time or manner of enjoyment of the beneficiaries under a trust.

[BobKamman]

 If a donor transfers by gift less than his entire interest in property, the gift tax is applicable to the interest transferred. The tax is applicable, for example, to the transfer of an undivided half interest in property, or to the transfer of a life estate when the grantor retains the remainder interest, or vice versa. However, if the donor's retained interest is not susceptible of measurement on the basis of generally accepted valuation principles, the gift tax is applicable to the entire value of the property subject to the gift. 

Giving the son cash to buy the house is not an "incomplete gift."  If the son gives the parents a note, promising to pay it back on a certain date, then there is at least imputed interest unless the amount stated is at a rate acceptable to IRS.  The imputed interest may be subject to gift tax, or income tax, or both.