My MIL died in late 2014. Dh’s sister and brother are handling the estate, though most of the work is falling to SIL, who was on a joint account with my MIL. In addition to the savings account, money will come in from the sale of her home, and I think there are stocks to be sold. No one is in a hurry to get this settled, however …
My SIL wants to start writing checks to dh and I off that joint account at an amount under which a gift tax would kick in, so that’s $14K. We haven’t been in a hurry to collect because we have one more year of FAFSA and CSS to file, for 2015, and it’s to our advantage not to take on this money as it will affect FA by giving an uncharacteristically inflated sum in our savings. We plan to use this money as soon as we get it to pay off our mortgage. The $28K from these two gifts will do it. Here’s the main question: If she goes ahead and writes us the checks with a 2015 date, but we don’t cash them until some time later in 2016, we don’t technically have to claim it in 2015 on the FAFSA or CSS, right? We’ve always used the EOY statements from our credit union for taxes and FA paperwork. But if we don’t cash them until 2016, does that mean we can’t get two new checks dated and cashed in 2016 without incurring taxes?
Also, my BIL believes that it’s better for each of us to get two $7K checks instead of one for $14K. Any idea why?
YOU, as the payee, will never have to pay taxes on the gift. Your MIL’s estate might have to pay, but it would depend on how big her estate is, how many other gifts she’s given to you over the years. Even if you received $30-40k, it is unlikely MIL would have exceeded lifetime maximums. Less paperwork if you stay to $14000 per year, but maybe no tax savings.
Why wait? Get the checks, cash them, and pay the mortgage. It is not income to your 2015 tax year, and as far as the IRS is concerned it is a non-event for you. If the money is in an account then it will be considered an asset on the day you file CSS/FAFSA. If you are holding a check, it really is the same as any other asset in your possession; the check is an asset worth $14000. You are supposed to report all amounts in your bank accounts, wallet, couch cushions, savings bonds, and piggy bank on your FAFSA on the day you file. If the CSS is for a school that considers your home equity, you may just have to wait.
I don’t think the estate is penalized if it writes a check in tax year 2015 and that check is not cashed until 2016, but again why take the chance? Either wait until 2016 for the money, or get it in 2015 and spend it in 2015. I don’t understand the $7k checks. You and your spouse can each get $14k/yr ($28k per year for two people) from an estate without the estate having to pay a tax.
You’re saying that if we get the checks and pay it toward the mortgage then it’s not income in 2015, because that money is come and gone? That makes sense. We have a lot of equity in the house (bought as a foreclosure in the '90s, and it’s more than tripled in value) so in that sense having another $28K in equity won’t make that much difference for CSS I guess, right?
Do others agree?
Thanks for the response. I don’t know why it’s always so clear when I’m talking to someone else, but it gets cloudy when it’s my own money. I guess I’m afraid that reporting less than $5K left on the mortgage will really mess with our FA.
The MIL’s account was joint with SIL so doesn’t that exclude it from the estate? Isn’t that why SIL is concerned with gifting limits (because the $14k/donee is a gift from SIL)?
I’m saying a gift is not income, no matter if you get it in 2015 or 2016. It’s an asset, but not income. It will not be included on your taxes. However, if it is in your possession on the day you file FA forms, in a bank account or in cash, it is an asset. A check is a little different as the bank won’t consider it gone from the MIL’s account until it is cashed. You run the risk of holding check and then having it not honored. Checks are only good for 180 days unless a shorter period is specified on the check (60, 90, 120 are common).
Just make sure you aren’t holding the money on the day you file. Either don’t take the gift now, or take it and spend it.
I see what you’re saying, twoinanddone. We were considering holding the checks until March or so, after filing the FAFSA and CSS but within the 180-day window.
Will the school notice/care that the mortgage on our home went from, say, $35K last year to $3K this year and ask questions?
Not on the FAFSA, but it’s up to the school to do what it wants with the value of the house on the CSS. Some consider the equity in a home, some disregard it up to a certain dollar amount or percentage of mortgage.
^^^ That’s my concern … that by paying so much toward the mortgage this year, it’ll trigger something that comes back to bite us. I mean, clearly we received money we don’t normally have in order to pay it down so dramatically. I’m going to sleep on it and with a clear head in the morning come back to this. Thanks!
A gift must be accepted to be complete. There’s a timely mailing rule, but if the check doesn’t clear in the normal course of business because you’re holding it, SIL arguably hasn’t made a 2015 gift and you’ve defeated her intent.
Assuming you’re married and separate property rules aren’t of concern to you, she could gift each of you $14k in the same calendar year without having a gift tax filing obligation, as long as there were absolutely no other gifts (no Christmas / birthday presents of cash or stuff, for example) to either of you during that year. Or she could deposit all the money into her joint account with her husband, and they could each gift each of you $7k, which leaves plenty of room for Christmas and wouldn’t require a 709 for gift splitting.
Other people have already covered the financial aid issues.
Home equity should be assessed less harshly than cash, I think. I don’t think the school will question how you paid it off. They likely don’t look at previous years CSS when evaluating the current one.
@youdon’tsay - I don’t feel confident enough in my answers to present them as facts, but I’ll offer some things that I’d think about if I were in your situation. Hopefully, someone more knowledgeable than I will chime in. 1) Since your MIL has died and her will/trust lays out who the beneficiaries are, wouldn’t you have to claim it on the CSS regardless of whether you’ve taken possession of it? At least your portion of the cash in the estate? As I said, I’m not sure about this, but I’d want to look into it. It won’t affect your tax return and probably not the FAFSA, but now that she has died, there is no question who the beneficiaries of her estate are. 2) Re. the $14k to one spouse vs. $7k to each spouse - our state offers a property tax abatement to residents with low income. We have to fill out a special property tax worksheet and include gifts over $6,500 to each spouse. Therefore, if one spouse receives $14k, you would have to include $7,500 as an excess gift in that spouse’s column of the worksheet. If each spouse receives $7k, you’d only have to include $500 in each spouse’s column. Not sure what state you’re in, but you might want to look into this.
Madison, we don’t know how the account was held, i.e. that it bypasses the will and is 100% SIL’s money. The money could have been a trust account where both SIL and MIL had signing privileges but the assets DO NOT pass to the SIL but pass to the trust to be distributed according to the terms of the trust. The assets could have been the MIL’s with the SIL having signing privileges in case the MIL is incapacitated but not 50/50 split of those assets.
Regardless of who is “handling the estate” there is a legal executor who is responsible for income tax filings for 2014 (up until date of death), liquidating assets (including the house and stocks), paying state estate taxes (most states have lower trigger levels than the federal government) and ensuring that assets are distributed according to the will and any trust agreements. And of course, paying off debts of the deceased- medical bills, any other claims which are presented.
If your SIL starts distributing assets before satisfying the tax obligations, you’ve all got a bigger problem than a few thousand dollars more or less in financial aid. So maybe a quick family meeting for a check in- what the lawyer says, can you start to distribute assets and if so, have all obligations been satisfied, etc.
The IRS doesn’t care that an heir has payed off their mortgage with assets of the estate. If those funds were distributed but the deceased never filed and paid income taxes for 2014, that tax obligation doesn’t evaporate just because the SIL started playing Santa Claus!
Find out the status of the estate before you plan your windfall.
OP’s concern is about how the money (gift or inheritance) will affect financial aid, not necessarily what the tax ramifications are (although that is likely a consideration as well). Profile specifically asks about cash received by the parents, outside of anything that’s included on a tax return. I don’t see any reason why a cash gift or inheritance shouldn’t be reported in response to this Profile question.
OP, if you receive a check in 2015, it needs to be reported as received in 2015, even if you don’t cash or deposit it until 2016. If you are holding the check, you have constructive receipt, and can’t claim that you don’t have the money simply because you haven’t presented the check for payment. You say that the Profile for the 2016-2017 academic year (reporting 2015 financials) will be the last one that you need to file. If that is indeed the case, and you want to avoid having to report the gift/inheritance as received in 2015, ask for the check to be delivered to you in early 2016. Then take that money, and pay off your mortgage as planned, so that it no longer is available to report as an asset when you file FAFSA and Profile a few months later.
No. It can sometimes take years to settle an estate and make distributions to heirs/beneficiaries. Generally, CSS/Profile is only interested in assets that are currently available to fund an education. (I say generally because a Trust of which the student is a beneficiary must be reported as a student asset, even if the Trust funds are not currently available.)
Madsion, there are all sorts of joint accounts. I have a “joint account” with another party but the assets in the account don’t revert to me when that person dies. You can’t tell by looking at the check (which has two names on it- mine and the account owners) although I’m assuming that if someone saw the check they would think that I had 50/50 ownership of the assets, or 100% ownership when the other party dies.
Neither assumption is- in fact- correct.
Check the fine print before spending the windfall. I have known executors who have distributed assets which were not yet cleared for distribution, and I have known heirs to spend money which was not theirs. Once there is a lien against the estate (if a creditor or heir has not had proper notification of a significant distribution for example) a judge can freeze the assets until the proper procedure in that state has been followed.
An account can be set up many different ways. A joint account will be assumed by the bank to be owned by the joint owner, and that owner can still access the account after one owner has died but it can also just be a dual signature account and in that case the acount might be frozen until lethers oF probate are presented. Seems lIke there is a good deal of money in this account. If the account was really a joint account, that money all passed to the joint holder and SIL got it all. It’s hers, not to be shared. Doesnt sound like that’s how anyone views this account, that it was MILs acount and is now part of the estate. If it really is a gift from SIL in 2016, MILs estate could still give a $14k gift in 2016.
Can’t the css be complete now and then just updated in the spring after taxes are filed? I don’t know if there is a responsibility to update the css for amounts received after filing. I only fill out the fafsa and there is no such obligation to update.
OP was worried about an increase of income. A gift will not increase income, but may have to be reported on css as an asset.
Oh, boy. It is complicated. I don’t know all the answers to your questions. I do know that the account was set up that way so that my SIL could write checks on my MIL’s behalf in her later years (like going shopping for groceries for her) and then to do exactly what we’re talking about doing … using that money to pay off any bills after she’s gone (settling with funeral home, for instance) and then to split it three ways among the kids. Basically, SIL is gifting MIL’s money.
Just to clarify, we’re aren’t talking tons of money. Right now, I would expect our portion to be less than $100K. There will be no lien, etc. Finances were pretty simple. But I agree with the previous poster that it can take years to sort this stuff out. One reason we haven’t moved earlier is that her brother, who was childless, died less than a month before she did, and she stood to get several hundred thousand from him, but a last-minute change in his will has complicated that. His will hasn’t been settled (some cousins are contesting), and the will of his wife, who died before he did, hasn’t been settled either! We are supposed to get some money from his will, as will our boys, but I am not getting involved in that crazy deal. We’ll either get it or we won’t. My SIL will save back money to pay any taxes that may arise from the stock sale. My BIL is wealthy, and this money is a drop in the bucket to him. He has a lawyer, and the $7K checks is what he advised, though I’m still unclear why. We’re the only ones for whom the money carries more implications (FA) and have the greatest need.
How about this … We take $28K now, in four $7K checks, use most of it to pay toward the mortgage, and hang on to some of it. An extra $5K in savings will mean a few hundred less in FA, which the money from my MIL will more than cover. And we’ll be grateful to have the money to pay a little more. Then next year, we take another $28K. Does that sound like a plan? I’m beginning to feel like we’re all overthinking this.
The only obligation is to fully and truthfully report income and other amounts received, if asked about, during the prior reporting period (generally the previous tax year) and reportable assets on hand as of the date of filing.
As I noted above, Profile asks for the amount of cash received by the parent(s) (or money paid on behalf of a parent) that isn’t otherwise reported on tax forms. This is in addition to, not the same thing as, being reported as an asset, which would only be required anyway if the cash received is still on hand as of the date of filing Profile. Do Profile schools factor “cash received” into the financial aid formula the same way that they do with earned income and other tax-reportable income? I don’t know, but I can’t see a school simply disregarding a large inheritance or gift without some professional judgment coming into play.