DOES THE GIFT TAX APPLY?

Joe, a widower, came into the office of a MPS attorney. 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 MPS attorney explained to Joe that there are pros and cons of gifting 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 this tax. In addition, giving assets away now, pose several concerns Joe might not be aware of.

The MPS attorney explained to Joe 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 that would put those assets at risk. For example, if his child gets divorced, sued, or dies, the assets would end up in the hands of someone other than Joe. In addition, if his child goes bankrupt, Joe’s assets would have to be used in his children’s bankruptcy.

Also, a gift to children, or others, could make Joe ineligible for Medicaid benefits for up to five years or more! The attorney continued to explain that perhaps the biggest downside of making gifts is that Joe’s children would receive the asset from Joe at his tax basis, which often leads to income taxes to the children when they dispose of the asset. The children would not have had to pay the income tax, had Joe given these assets to them after he died.

As to the gift tax, the attorney explained to Joe that he could gift $13,000 per year to any individual, including 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 IRS provides that Joe has a 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 $1,000,000 lifetime credit to $990,000. Since Joe only had $512, 000, the gift tax was not a concern to him, because he could never gift a million away, and so he would actually never be subject to a gift tax.

Proper planning ensures that your clients understand the gift tax rules and the significant risk with giving gifts during life. Contact MPS to discover how to help your clients transfer their assets to our trademark iPug™ trusts that permit them to retain control and retain benefits, but still have the protection they seek.