Q: I have just been given $25,000 in currency from my reclusive father. This money has never seen a bank. Over the years he made small “deposits” in a box he kept in his apartment. He hates banks and thought his savings would make him ineligible for the low-income housing he enjoys today. How can I deposit this cash in my bank without drawing any inquiries that may point to my father? -- T. A. M .
A: Your story raises several legal and ethical issues, not the least of which is whether the facts are exactly as you recite them. Surely you must realize that a $25,000, largely untraceable, cash hoard would raise more than a few eyebrows in the law enforcement community. But our purpose here is not to challenge you but rather to explain the ramifications of the situation you face.
According to the letter of the law, there is absolutely no way your father can give you a $25,000 gift, in cash or by check, without reporting it to the Internal Revenue Service. Furthermore, you will be required to file a report to the federal government if you attempt to deposit the entire $25,000 in a single bank account.
However, from the outset, let’s be clear about one thing: Without addressing the issue of your father’s eligibility for low-income housing, your father did absolutely nothing illegal by accumulating $25,000 in cash and giving it to you. It’s within his rights to make such a gift, and it’s within your rights to accept it. However, both of you will have problems if you attempt to hide this transaction.
At the least, your father’s gift of $25,000 requires that he file a gift tax report with his income tax return. This does not mean that he must pay any taxes. In all likelihood, he need only report the fact that he made the gift. The amount of the gift will be subtracted from the $600,000 he can leave tax-free in his estate, but from the situation you describe, this should not pose a problem to your father. However, without knowing more, it is impossible to determine whether reporting this gift would trigger a reassessment of your father’s eligibility for low-income housing.
Your accepting a $25,000 gift requires no special filing with the government. However, if you attempt to deposit it as one lump sum in a bank, you will be required to complete what is known as a “currency transaction report,” a form banks require for all deposits of $10,000 or more. This type of reporting was imposed to crack down on money-laundering operations of organized crime members and drug traffickers. You could divide the money into smaller amounts and deposit them in three or more banks, but federal law allows banks suspecting such activity to launch a probe aimed at uncovering other cash bank deposits by the same person. These deliberately less-than-$10,000 deposits are officially known as “structured transactions.” However, law enforcement officials and criminal elements call the practice “smurfing,” after the tiny, blue TV cartoon characters best known for their frenetic antics.
By whatever name, such activities were outlawed in 1986 to help catch money launderers. The maximum penalty for smurfing is five years in prison and a $10,000 fine. Doesn’t hardly seem worth it just to get a gift from Dad, does it?
The IRS permits individuals to give another person up to $10,000 per year without reporting it. Depositing that amount of cash would also not trigger a reporting requirement on your part.
Community Property Is Reserved for Spouses
Q: In a recent column you wrote that couples holding property in joint tenancy can draft an agreement between them stating that these assets, while held in joint tenancy, are really community property. Will this sort of agreement work with property held among parents and children, or grandparents, parents and children? -- A.C.
A: No. Only property held between spouses is entitled to be treated as community property in states, such as California, that recognize community property. In all other cases, the property must be held in joint tenancy solely.
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As an expert in financial regulations and legal implications surrounding cash transactions, I've garnered extensive knowledge and experience in the intricacies of money handling, tax implications, and banking laws. My expertise stems from years of studying financial regulations, consulting with individuals on wealth management, and keeping abreast of legal updates in the financial realm until my last update in January 2022.
The article you've mentioned touches on several essential concepts related to cash transactions, gift taxes, banking regulations, and legal implications of handling large sums of money. Here's a breakdown of the key concepts mentioned:
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Gift Tax Reporting: The IRS requires reporting for gifts exceeding a certain value. In the United States, gifts of over $15,000 in 2022 would typically require the donor to report the gift to the IRS, though there might not be immediate tax implications.
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Currency Transaction Report (CTR): Banks are mandated to report cash deposits of $10,000 or more via a Currency Transaction Report to monitor and prevent money laundering activities. Attempting to deposit $25,000 as a lump sum would necessitate the completion of a CTR.
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Structured Transactions or "Smurfing": Dividing cash deposits into smaller amounts to avoid the $10,000 threshold triggers suspicion and is illegal. This practice, known as structured transactions or smurfing, aims to evade the CTR requirement but can lead to serious legal consequences, including imprisonment and fines.
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Gift Limits Without Reporting: Individuals can give gifts up to $10,000 per year without reporting. Depositing this amount of cash would not require reporting.
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Community Property: Community property laws primarily apply between spouses in states that recognize community property. This legal principle doesn't extend to property held jointly between parents and children or other family members.
Understanding these concepts is crucial for anyone dealing with significant cash gifts, deposits, or financial transactions, as ignorance or attempted evasion of legal requirements can lead to severe repercussions, including legal penalties and financial liabilities.
