Q: We want to move into a bigger house and my parents want to help us by gifting money to us above the $10,000 per person per year that is now being given. How would you suggest we arrange this?

A: You have three options. First, your parents can go on title with you. For example, if their contribution represents half of the equity, then they would receive a one-half share of the ownership. (As a hint, in taking title, your spouse's and your half-share and your parents' half-share should be held in tenants in common between each half-share, but in joint tenants internally.) Then as the years go by, your parents can deed, by quit claim, a share of their part taking advantage of the $10,000 per person transfer per year. And in their Wills, they can leave you their remaining share in the house.

A second way would be for them to loan you the money and take back a note secured by a second deed of trust (after the primary deed of trust). Then your parents can forgive the note payments and/or loan balance using the $10,000 exemption. In their Wills (assuming you are a beneficiary), your share of the inheritance would include your note, thus in effect, canceling your liability. There would be no income tax consequences to you by inheriting and eliminating the debt. But your parents would have to claim as income the interest from the note based on either the interest rate of the promissory note or the imputed rate (determined by the IRS as the minimum rate charged in a bona fide loan arrangement), whichever is greater. This is true even if the interest was part of the amount forgiven when using the $10,000 exemption.

A third way would be for your parents to deduct the amount above the $10,000 exemption from the current $1,000,000 "estate" tax deduction. Thus, if a transfer was $200,000, then that amount could be given tax-free, but the $1,000,000 estate tax exemption would be reduced to $800,000. Since each parent has $1,000,000, it would be possible to deduct $100,000 from each $1,000,000, leaving $900,000 to shelter assets from estate taxes.

In the past the gift tax exemption amount was tied to the estate tax exemption. Thus, when the latter went up, the gift tax exemption rode its coattails up too. The latest "reform" in the tax law has caused a divorce. Unless the law is changed, as the estate exemption goes up to $1,500,000 in 2004, $2,000,000 in 2006, and $2,500,000 in 2008 and then disappears in 2010 (only to reappear in 2011), the gift tax exemption will remain at $1,000,000, so everyone needs to be careful.

As a footnote, there is a great debate regarding the amount of the exemption in 2011, with opinions ranging from $675,000 to $1,500,000. Based upon what several Washington insiders have told me, I am in the $675,000 camp.

There are also several other ways to go. But the bottom line is that the transfer can be done tax-free and set up to maximize other tax and legal goals of all interested parties, except for the IRS, of course.