Does giving money to your spouse to avoid tax make any sense?

Question

In this well known scene from The Shawshank Redeption (content warning: language), Hadley is complaining because he is getting an inheritance, but he knows that the IRS is going to take a bunch of it in taxes. Andy tells him that if he trusts his wife, then he can keep the full amount by giving it to her. His explanation is that the IRS allows a "one-time only gift to your spouse for up to $60,000", tax free.

This scene never made sense to me. I've heard of gift taxes; and how gift below a certain amount are not taxed. But wouldn't this only mean that there is no additional gift tax that would need to be paid for giving the money to someone? Wouldn't the money he received still be taxed as inherited money; unrelated to what he then chose to do with the money (give it away, spend it, etc)?

Is this simply something made up by the movie (or maybe the book; I don't know if this dialog comes from the book or not)? Or is there some sense to it, such as maybe him being allowed to deduct the money he gave away, similar to if he had given it to a charity?

Is this something where the laws may have been different in the 1940s from today?

Answer 1

You're correct- the tax advice given in that scene doesn't make any sense, and it might actually make the scene even better if you know that. The advice was bad for three reasons:

1. Even in 1949 (like today) there would be no tax at all on the inheritence. Estates may pay taxes before the money is distributed (and his brother's estate would have paid taxes), but after that if you're due $35K, you get that $35K tax free. Hadley was misinformed in the first place that he was going to owe tax.
2. Even if there was tax owed, giving the inherited money to a spouse wouldn't change that fact.
3. There is no limit to how much money you can give your spouse tax free (not $60K or otherwise). In this case, "Your money" is what you bring to the marriage, and any inheritances and gifts you receive during the marriage.

My assumption is that Andy knew all of this and was just toying with Hadley and capitalizing on an opportunity to get free beer for his friends.