The Heart, As Well As The Head, Plays Role In Estate Decisions

Good estate planning goes behind the numbers to take the individuals involved into account.
When it comes to giving gifts to family and loved ones through a will or while still alive, there are tax implications to be taken into consideration, but a host of other factors come into play, as well.
A recent article on the Motley Fool website dealt with the subject in some detail.

Money (Photo credit: 401(K) 2013)

Money (Photo credit: 401(K) 2013)

“You’re in your golden years, and you’re thinking hard about estate planning,” Paula Pant, a contributor to WiseAdvisor, wrote in the article. “You want to leave gifts for your heirs, but should you wait until you pass away? Or should you give some money to them now?
“Gift tax versus estate tax – gift tax is the tax imposed by the federal government on any transfer of property to an individual without any compensation in return. ‘Property’ in this sense includes both tangible property, like art or furniture, and intangible gifts like stocks and cash.”
Pant goes on to point out that currently the law allows a lifetime gift limit of $5.34 million, after which taxes of 40 percent are imposed. But there’s also the added complication of an annual exemption $14,000 to consider.
A good estate planner will help people make up their minds from a purely financial perspective which options are the best for taking care of heirs.
Exceptional estate planning will help clients come to grips with the pros and cons to either approach Pant points out in her Motley Fool contribution.
For giving heirs money now, these include:

  • You get to see them enjoy it. If you’d prefer to see your gifts in action, giving your heirs the money now gives you a chance to see the difference it makes in their lives.
  • You can advise how they spend it. If you’d prefer to see your gifts in action in a specific way, giving the money while you’re still alive gives you a chance to let your heirs know how you’d prefer they spend it.
  • You can give the gift in the form of paying for something. If you really want to ensure the money is spent on the thing you want it to be spent on, you can pay for something rather than giving your heirs the money for it.
  • You can stop giving them money if you see them falling off the rails.

The factors that weigh in favor of waiting until you pass away include:

  • You may need the money later. What if you find that you need the money to pay for your own expenses during your lifetime?
  • Your heirs might appreciate it more and spend it more wisely. By waiting until you’ve passed away, you give your heirs a chance to ‘make their own way in the world’ at a younger age. Rather than relying on an annual cash infusion from you, your heirs will be older and more responsible when they receive the inheritance. This might cause them to appreciate the gift more, as they will have experienced the task of earning money.

“Which should you choose?” Pant asks. “Should you give your heirs gifts now? Or wait? Ultimately, there’s no ‘right’ answer. This is a personal choice.”

Tax-Free Gifts Flowed After Congress Changed The Law

A law passed late in 2010 has resulted in a quadrupling of tax-free gifts less than two years later, according to a recent item by Bloomberg News.

20 Dollars art3

(Photo credit: Wikipedia)

Congress approved legislation that let wealthy Americans make gifts with no tax penalties of as much as $5 million, and they sure responded, the story noted.
“U.S. taxpayers reported making $122 billion in nontaxable gifts on the returns they filed in 2012, more than four times the amount in each of the two previous years,” according to Bloomberg News.
The Internal Revenue Service released the data in late January.
“Most of the money, $84 billion, came in the form of gifts exceeding $1 million, and those were made by fewer than 30,000 people, according to the IRS,” the story stated. “The data cover tax returns filed in 2012. Typically, gift-tax returns are due on April 15 of the year after the gift is made.
“The law created a chance for wealthy families to move assets out of their estates and let their heirs benefit from any appreciation in value, said Lisa Featherngill, a managing director at Abbot Downing, a wealth-management unit of Wells Fargo and Co.”
“There was a huge scramble after 2010 to take advantage of the new law,” she told Bloomberg News. “There was concern that the law was going to revert.”
The 2010 law increased the lifetime gift-tax exclusion to $5 million from $1 million,” the story noted.
“The 2010 law was temporary and was scheduled to expire in December 2012, and estate planners encouraged their clients to make gifts soon in case Congress changed the law,” Bloomberg noted. “In January 2013, after the higher exemptions had technically expired, Congress extended the gift-tax changes and permanently linked them to inflation. The exclusion this year is $5.34 million per person.
That permanent feature of the tax code means that the increase in nontaxable gifts in 2012 probably won’t last, said Harry Stein, associate director of fiscal policy at the Center for American Progress, a Washington group typically aligned with Democrats.”

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While Not Advisable, Battling IRS Need Not Mean Defeat

Getting into a fight with the Internal Revenue Service is almost never a good idea.
However, one wealthy woman did win a legal battle regarding the gift tax exemption.
“There wouldn’t seem to be a whole lot of loopholes available for people making use of the gift tax exemption to reduce their estate taxes,” according to a recent article on the website Lifehealthpro. “But that doesn’t stop people from trying to invent ways around it. One such person was Jean Steinberg, a very wealthy 89-year-old woman with four daughters. She gave the daughters a $72 million gift of cash and securities, which, needless to say, was well over the gift tax limit. But she came up with a strategy to reduce the value of that gift, and thereby reduce the taxes on them.”
That strategy, according to the story’s author, Tom Nawrocki, hinged on what’s termed the “three-year rule,” which is aimed at preventing people from giving away their property just prior to death.
“If Steinberg had passed away within three years of making the gift, the assets would revert to her estate, and the estate would owe tax on it,” the article continued. “In order to keep her estate tax from paying the full rate on that amount, Steinberg asked her daughters to take the full responsibility for it if she should pass away within three years.
“Steinberg’s daughters agreed to assume any gift or estate taxes that would result if she passed away within three years of making the gift. She then made the claim that the value of their gift should be reduced by the amount that would revert back to the estate in case of their mother’s death. The gift had been drawn up very carefully. If the daughters did not agree to cover the estate taxes, they wouldn’t be eligible for any further distributions from the estate. Therefore, Steinberg argued, the gift was contingent on the payment of those taxes and should be reduced by their value. And since Steinberg was 89 at the time, there was a good chance she wouldn’t make it through that three-year window.”
The IRS naturally disputed this interpretation of things, and wanted an additional $1.8 million in taxes.
“But Steinberg, who had hung in there and was still alive, fought the IRS ruling. Earlier this month, the tax court decided in her favor,” Nawrocki wrote. “It ruled that the increased tax burden the daughters took on did indeed count as a reduction for the value of the net gift.”

Changes in the Law Change Where it’s Best to, Um, Die

Death may be a certainty, but the taxes attached to departing this veil of tears are anything but.
“When it comes to state death taxes, nothing’s certain,” according to a recent article on Forbes.com.
Entitled “Where Not To Die In 2013 Update,” the piece described changes in the law in various states that have had an impact on estate taxes.
“ In the spring legislative season: Indiana made the repeal of its inheritance tax retroactive to Jan. 1; Delaware decided not to let its temporary estate tax sunset on July 1; and Minnesota tweaked its estate tax to apply to non-residents who own property there through pass-through entities, and it added a gift tax,” the story points out. “Meanwhile, North Carolina is poised to be the next state to do away with its estate tax as its legislature grapples with major tax reform in the coming weeks. That would bring the tally of states where you have to worry about a separate state estate or inheritance tax down to 19 states plus the District of Columbia.”
“Each state is looking at the state estate tax based on revenue considerations,” Charles D. Fox IV, an estate lawyer with McGuire Woods in Charlottesville, Va., was quoted as saying.
If the repeal does go through in North Carolina, it would be retroactive to the first of the year, the same as in Indiana.
“It’s a great bill because of automatic repeal,” Palmer Schoening, a conservative strategist who publishes the Family Business Report, told Forbes.com. “North Carolina prides itself on being a bastion for retirees, but as it stands now their state isn’t friendly with respect to death taxes.”
Some states are moving in the opposite direction along the lines of Delaware’s extension of its expiring estate tax, according to the article.
“And Minnesota, with an estate tax with a $1 million exemption, made a significant change by adding a state-level gift tax that kicks in on gifts above $1 million. That makes it the second state to have a gift tax. Connecticut is the other; its gift tax kicks in at $2 million.
Minnesota also is trying to grab more revenue with tweaks that will disallow common ways folks now get around state death taxes. The new law pulls gifts made within three years of death back into the estate, and it requires non-Minnesota residents who own property in the state via a pass-through entity like a trust or partnership to include the value of that property in their estate for Minnesota estate tax purposes.”