As funny as social media portrayed the check-the-label memes, you can’t deny that checking the label must be taken earnestly as well. One brief example is when you receive a large amount of money from a friend. The big question is, is that surprise a gift or a loan? You could drown in debt or plunge into bankruptcy without an explicit statement that acknowledges if the money received is an actual gift or not. Thankfully, the gift receipt or acknowledgment can be achieved simply through writing. So the next time you receive or send financial gifts, always clarify the label by incorporating a gift letter in the picture.
Gift letters, whether formal or informal, are essential documents in proving if any received money from a family member, friend, or anyone is labeled as a gift. Mind the term “gift” because that means the contribution received must not be paid back by the recipient at all. And this detailed letter not only confirms what the gift is or how much it costs but also answers who the donor and the receiver are. Thanks to this written statement, it can be used as evidence when legal documentation is required to acknowledge any gift received.
Did you know that the Internal Revenue Service (IRS) reported that the estate and gift tax exemption is totaled $11.58 million per person in 2020?
Indeed, gift letters confirm that anything being given to you, especially a large sum of money, is, in fact, a gift. But why is it necessary? Easy. This legal letter confirms you need not pay the sender back, which would have happened for those taking a loan or mortgage. For example, it would be shady to receive a million dollars from a friend. But you might later found it that it was only loaned so the burden of paying it back is up to you. Gift letters explain all about the gift, including mortgage lenders who question the sudden plethora of cash in your savings or checking account.
Moreover, a gift letter is useful for tax reasons. This usually happens when a borrower gets extra help in a real estate or new car down payment. In 2020, IRS even confirmed that estate and gift tax exemption is totaled $11.58 million per person. And for charities or any donation, the gift letter also acknowledges if the contribution is tax-free. At least anyone who doubts your savings’ immediate influx of money won’t have to suspect you of theft or any illegal financial activity when gift letters answer their concerns.
A gift letter that does not contain crucial information only makes it useless. And if you are wondering what the essential parts or details to discuss in a gift letter are, these are the elements you have to watch out for:
Do not assume that every gift letter is of the same type. Otherwise, it could hinder your full understanding of the letter’s message. In fact, you can learn from each type regarding when you might or not need one. Without further ado, here are the basic gift letter types:
Most monetary gifts in large amounts are under estate planning gift letters. And you would want to keep these documents safe for your own protection unless you might end up paying them back. So always check if a gift is related to a home purchase because you deserve security under your estate plan.
When a property is gifted to you below its market value, then you are lucky enough to count this as an equity gift letter. Equity gift letters let you see the disparity between the actual market value and the lesser paid sale price.
Loan rejections get lesser with a mortgage gift letter on hand. Remember that in house hunting, big cash gifts are the best way to go. Just make sure the monetary gift is, indeed, a gift before making a down payment for that mortgage contract.
Well-prepared parents most likely have gifts planned for their children once they get of age. And whatever gift they can give to secure their children’s financial future, it is helpful to note it down under a parents’ money gift letter for confirmation.
The Federal Housing Administration (FHA) gift letters are specifically meant for FHA loans. That means FHA-accredited lenders and insurers get to issue these loans. And this gift can very well help those in the lower to the moderate-income sector of borrowers.
Believe it or not but gift letters are not that difficult to prepare. Using simple words in plain English and in one page alone can already work. But, it doesn’t mean you just take its content and data for granted. It must answer the important questions and be reliable enough for evidence. In this section, you will learn about the steps on how to make a decent gift letter.
The hassle of making a gift letter from scratch won’t bother you anymore when you use the sample gift letters enlisted in this post. You have plenty of templates to choose from and you can even customize your letter afterward. Thus, you have the leeway to change the format, design, and other contents of the gift letter. Ensure that you are confident about the output of your digital or printable document in the long run, especially when you are the donor who is about to send it to the recipient.
Don’t make a gift letter just yet without having enough background about the gift itself. As the sender or the one designated to make the gift letter, full knowledge about the gift is required. That way, you would know what to write about in the gift letter. This brings you to know if the gift is in a form of cash, a gift certificate, a loan, or anything else. And what is it for? Is it for a birthday gift, wedding gift, or any other reason at all? Also, this leads you to determine the type of gift letter you are going for.
Besides the types of a gift letter, you also know that there are standard parts of a gift letter, which were already discussed. So do not forget to insert the donor’s name, gift amount, down to the affixed signatures to complete your gift letter. Remember that lacking any significant detail could lessen your letter’s credibility. And you should not only add the parts as it is because you need to organize them into categories or by sections. How you organize that is up to you.
Most importantly, don’t complicate things. A simple and straightforward gift letter will already suffice. That means you stay direct to the point about the message you are trying to say in the letter and that the words are easily understandable for the recipients. That way, you prevent unnecessary and flowery words that only weaken your message. Come up with a final evaluation of the whole document before you actually produce and submit it.
You can notarize a gift letter to make it credible enough but it doesn’t exactly need to be notarized. If the donor and the recipient already affixed their signatures in the letter, then that document is valid enough.
Gifts may come in cash, check, and most tangible products. Other forms include below-market loans and forgiving debts. Another form is by transferring a title to a property or stock without any value exchange.
No, recipients need not report about the mortgage gift to the IRS nor pay the gift according to its value. Equal value exchange is unnecessary when money or properties are gifted anyway.
Before you spend that monetary gift from anyone for anything due to overwhelmedness, confirm the label ahead. Lenders and recipients themselves usually frown upon borrowed money for down payments and purchases in the first place. With clarification that the money received is a gift, not a loan, you feel confident about sending a thank-you letter right away and using the gift as planned. So if you need the quickest assurance about the gifts, always depend on sample gift letters. Download now!
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