Long story short:

My wife was injured in a wreck when she was 18. She received a settlement but her parents used the money on a new house. (Talked her into it but it was in their name)

Fast forward to now, they just sold a house(not the one they bought with the money) and now want to pay her back.

Lawsuit money is supposed to be tax-free but this transaction will look like a gift, not a settlement since they are just writing a check from the money they got from selling a house.

Any ideas on how to handle the tax side of things? I'm guessing she will need a paper trail to trace the money back to the settlement? Or any ideas on a good tax lawyer?

The recipient of the gift needs nothing. The donor is the one who must be concerned about gift tax or exemption and filing paperwork.

I hope the initial transaction will not be characterized as a gift to the parents. Not stated, but it appears there are no documents to support it as a loan with interest payments etc. So if it wasn't a loan...

I'm not sure how the original transaction was characterized. What I think happened is they received the settlement on a joint-account that her parents controlled and spent. (This has been a sore spot between her and them. She was young and just took their advice which heavily favored their own interests)

But I do know they had a lawyer set everything up initially and her mom says she has all the documents from the lawsuit still. Luckily that lawyer is a personal friend of theirs so we can get him involved again.

if it was deposited into a joint-account and then spent, I suspect there's no recourse back to the original transaction.

The parents can either give her back the money and eat the gift tax themselves, or perhaps they can establish an irrev trust with her as the sole beneficiary and try to write it in such a way that gives the beneficiary to make a wide array of distribution requests. I'm neither an attorney or a CPA, but I believe that would ensure your wife receives the benefit of these funds and the tax burden on her parents is lessened.

It sounds to me like a trust should've been established in the first place for these settlement funds (trusts will protect the funds from a teenager and from her parents whose eyes got really big when they saw the dollar amount). I would ask pointed questions of the attorney why that wasn't considered in the first place. (Maybe because the parents wanted control of the funds and he was their friend?)

Sounds like the parents need to write a check for the amount plus interest and eat whatever tax bill they have coming to them. Their greed is their own issue.

Could her parents "loan" you and your wife the money (with loan docs to make it official) and forgive the loan at the maximum amount allowed under the gift tax threshold ($14,000 x 2?) until the entire "loan" is forgiven?

I'm not an accountant, just throwing out an idea.

Both parents could write a check to each of you for the max gift amount without tax consequences. Was the settlement larger than 56K?

Do you have any kids? The parents are legally allowed to gift you, the wife, and each kid a certain amount / year. Considering we just went from 2015 to 2016 you likely could get two years worth of gifts done at once if the receiver received the check in 2015, regardless of when they cash it. Obviously, that would only apply if you received the check in 2015. I'm not giving advice, please contact a CPA or an attorney for assistance.

The only tax consequence at this point seems like it would be a hit against the lifetime giving cap. From the situation, the parents don't seem like the type of people who are going to be giving away/passing on an estate of 5+million.

But I know pretty much nothing about this, except the research I did the one time my in-laws gave me a gift of considerable size.

Daughter gets injured when she was 18 and the parents spent her settlement? Under no circumstances should that be right.

I totally agree. I came in this long afterwards when we got married. It's very frustrating because I'm paying her student loan debt which was fairly large. These loans could have been paid out immediately when this was originally received.

Based off the responses I think I need a professional to hear the whole situation out and give expert advice.

I guess I'll be the guy...













how much was it?

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The only tax consequence at this point seems like it would be a hit against the lifetime giving cap. From the situation, the parents don't seem like the type of people who are going to be giving away/passing on an estate of 5+million.

But I know pretty much nothing about this, except the research I did the one time my in-laws gave me a gift of considerable size.

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Correct, unless she is going to inherit more than $5,000,000 there really is no reason to consult a professional.

If more than $112k her parents may need to file gift tax exemption. If less than $112k, need to split $56k to check dated 2015 and rest in check dated in 2016.

That is not good advice.

Do you trust your wife? Do you think she'd try to go behind your back and hamstring you?

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These loans could have been paid out immediately when this was originally received.

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Have the parents pay them off now with the funds -- paying someone's debt is not considered a gift AS LONG AS they write the check directly to the lender and not to your wife first. If there's still money left over, she could take out another loan and have the parents pay that as well.

Have a CPA check this, but I'm pretty sure its correct. A couple of weeks ago when I was spending my soon to be lottery winnings (that didn't materialize) I was planning what to do with 300 million.

How much was the settlement?

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These loans could have been paid out immediately when this was originally received.

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Have the parents pay them off now with the funds -- paying someone's debt is not considered a gift AS LONG AS they write the check directly to the lender and not to your wife first. If there's still money left over, she could take out another loan and have the parents pay that as well.

Have a CPA check this, but I'm pretty sure its correct. A couple of weeks ago when I was spending my soon to be lottery winnings (that didn't materialize) I was planning what to do with 300 million.

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No, no, no, no,no, no

figured I would copy my post from the politics board.

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The inheritance allowance and gift allowance are the same same thing, it is $5,430,000 for 2015. A person can only gift away that much or leave that much in an inheritance before taxes are owed.


If someone gives their kid $1,000,000 then they can only leave $4,430,000 total before taxes have to be paid.

In addition to that you can give away $14,000 a year to I think as many people as you want, so two parents can give their kid+spouse $56,000 a year, and that does not count against the $5,430,000 a year.

So if you have a spouse and more than $10,860,000 start giving your kids $56,000 a year or hire an accountant.

I think IRS form 709 keeps track of the lifetime thing.

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These loans could have been paid out immediately when this was originally received.

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Have the parents pay them off now with the funds -- paying someone's debt is not considered a gift AS LONG AS they write the check directly to the lender and not to your wife first. If there's still money left over, she could take out another loan and have the parents pay that as well.

Have a CPA check this, but I'm pretty sure its correct. A couple of weeks ago when I was spending my soon to be lottery winnings (that didn't materialize) I was planning what to do with 300 million.

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Pretty sure they have to write the check directly to the school to pay tuition in order for it to be unlimited, NOT to the lender.

I assume your wife is no longer in school so sadly that's not a possibility.

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She received a settlement but her parents used the money on a new house. (Talked her into it but it was in their name)

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I would have had so much fun with this.

Dad "As long as you live under my roof."

Me "Technically It's my roof now get me a beer old man."

Then wake up from coma 15 yrs later.

Seeing as how they spent the money from a joint account, could they not deposit the money back into another joint account?

Why not draft some document which outlines that the $ was a loan to them with a single balloon payment that happens to be, oh, next week.

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Seeing as how they spent the money from a joint account, could they not deposit the money back into another joint account?

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Because the joint account worked so well last time

She loaned her parents money to buy a house and they are now going to pay her back plus 10 years worth of interest.

Any CPA's or lawyers know anything wrong with this plan?

As the recipient, take the check and put it in the bank. Don't worry about the tax impact it might have on mommy & daddy. That's their problem. No tax impact to you.

Incidentally, they could give you up to $56,000 without any tax impact to themselves.

Mom give each of you $14K and Dad gives each of you $14K.

I don't think there is any need to deal with gifting rules

document the fact that both parties agree that the money today is repayment on an "un-documented" loan from prior years - the risk is IRS might consider there to be an unstated or deemed interest on the debt - if they are paying interest above what she "loaned" them back then, that portion of the repayment could be interest income for her to report