Joe, a widower, came into the
office of an attorney he had been referred to. He wanted
to avoid paying estate taxes or losing his assets to a
nursing home, so he asked the attorney if he should start
gifting his assets away to his children. The attorney
explained to Joe that there are pros and cons of giving
assets away. Upon review of Joe’s financial situation, the
attorney assured him the estate tax did not apply to him,
because he did not have sufficient assets to be subject to
it.
In addition, giving assets away now posed
several concerns Joe might not be aware of. The attorney
explained to Joe that giving gifts to his children will
forever put those assets out of his reach and fully under
the control of his children. While his children may be
trustworthy, outside events could occur to put those
assets at risk. For example, if his child got divorced,
sued, or died, the assets could end up in the hands of
someone other than Joe. In addition, if his child had to
file bankruptcy, Joe’s assets would have to be used to
satisfy his child’s creditors.
Also, a gift to
children, or others, could make Joe ineligible for
Medicaid benefits for up to five years or more! The
attorney continued explaining that perhaps an even bigger
consideration would be that making gifts today means that
Joe’s children would receive the asset from Joe at his tax
basis, which often leads to unnecessary income taxes to
the children, when they dispose of the asset, that they
would not have had to pay if Joe left the assets to them
after he died.
As to the gift tax, the attorney
advised Joe that he could gift $13,000 per year to any
individuals, including to his children. If he gifted in
excess of $13,000 to any individual or child within a
calendar year, it would be subject to a gift tax, but the
tax rules provide that Joe also has a five million dollar
lifetime exemption, in addition to the $13,000 annual
exemption. Therefore, if Joe gave away $23,000 to an
individual in one calendar year, the additional $10,000
would reduce his $5,000,000 lifetime credit to $4,990,000.
Since Joe only had $512,000 in total assets, the gift tax
would likely never be a concern for him.
The
attorney closed by saying that there are ways to protect
assets today to solve the problems Joe faces without tax
problems and without giving the assets to his children
today.
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