Is There a Gift Tax When Putting a Relative as a Co-Owner of a Mutual Fund?
When you put a relative's name on a mutual fund with yours, you're giving him a gift. To the Internal Revenue Service, you just gave that person half of your mutual fund account. This doesn't necessarily mean you have to pay gift tax, though. The laws concerning gift taxes are relatively complicated, but they offer multiple ways to avoid paying any gift tax.
Gifts to Spouses
When you give cash, mutual funds or anything else to your spouse, it's completely tax-free. The IRS exempts all gifts within a marriage from gift tax treatment or, for that matter, from estate taxes. While this can help you share your wealth with your spouse, it also means sharing an account with a husband or wife doesn't do anything to shrink the size of your combined estate.
The IRS lets you give a set amount of money as a gift every year without having to worry about gift tax. In the 2013 tax year, the limit is $14,000. In other words, if you put a relative's name on a $25,000 mutual fund account, it's completely tax-free. If you're married, each of you can give up to the annual limit, so in 2013, a married couple could give a $28,000 gift tax-free. Gifts up to the annual limit don't count toward your lifetime exclusion, either.
If you give more than the annual exclusion, you will need to file a gift tax return, but you probably won't have to pay taxes on it. As of 2013, the first $5.25 million of gifts you give during your lifetime or that your estate pays out after you die are tax-free. You will, however, have to file a gift tax return and let the IRS know that you gave the gift and that you used a portion of your exclusion.
There are two types of gifts you can give that are not subject to gift taxes, even if you've used your exclusion. When you pay someone's educational expenses or medical expenses, it's tax-free. To do this, though, you could not pay through gifting him investments. You must use your own liquid assets to directly pay the relative's medical or educational expenses.
The information in this article is current as of the 2013 tax year and is based on the permanent changes established in the American Taxpayer Relief Act signed at the beginning of 2013. Many of the dollar amounts in this article are indexed for inflation and can change, and the laws underlying this article can also change if Congress takes action.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.