When my grandfather retired from the farm, he transferred most of his business assets to his children. Each year, each child gifts $14,000 back to grandpa for his living expenses. What are the advantages and disadvantages of this arrangement?
Normally, gifts are not taxable income to the recipient. But the substance of this deal is a sale. Grandpa transferred a significant amount of assets to his children who now pay him annually; the IRS is not going to accept that these reciprocal transfers were gifts for no consideration. The tax law is way too sophisticated to allow labels ...