Giving away the estate requires strategy, planning

One strategy you can use in estate planning is “lifetime gifts”. In other words, you sign things over to your heirs while you’re still alive, instead of making them wait until you’re gone. Due to some recent proposed legislation in Congress, this strategy is becoming more tempting.

But be very careful here.

There are three main reasons people are taking a hard look at gifting strategies. Let’s examine each one separately.

Should I give away assets for estate tax purposes?

For the vast majority of Americans, the answer has been ‘no’. At the moment, the lifetime exclusion from estate tax – the amount of assets you can pass, tax-free, on your death – is almost $12 million. That is easily doubled for a married couple, so there aren’t too many people who have to worry about it.

However, that will probably change. Most of the Democrats in Congress want to lower that exclusion amount. The lowest I have heard bandied about as a serious number is $3.5 million. If it gets that low, individuals who are over $3.5 million (or married couples who are over $7 million) will need to consider making large gifts this year, before the new law takes effect.

If you do that this year, you are covered under the present, almost $12 million lifetime exclusion. So, for instance, if I had $10 million, and they lowered the exclusion amount to $3.5 million beginning in January, I could give away all of my money without any estate tax. The exclusion limit that counts for gifts, is the exclusion limit for the year in which you gave it away. If the exclusion dropped between the year of the gift and the year you died, they don’t get to retroactively charge your estate.

But even at $3.5 million, there aren’t too many people who are in serious danger of a large estate tax bill. For those who are just a little bit over that, making small annual gifts of $15,000 to the heirs is one possible strategy. The IRS doesn’t count that small amount against the lifetime exclusion. And that is from any one person to any one other person. So a married couple can give $30,000 (that is, $15,000 each) to each of their children, children-in-law, grandchildren, and anybody else they particularly like, and still have the full lifetime exclusion available.

But unless you’re in danger of being over $3.5 million in assets, there is no need to do that.

Should I give away assets for capital gains purposes?

This is a new one. Up until now, one of the reasons to not give assets away, if they have gone up in value, is that when your heirs eventually sell the assets they will have to pay the same capital gains tax you would have had to pay, if you sold it. But if you hold onto the assets until you die, there is a “step-up in basis” (to use the technical term), which effectively means that any capital gains tax is cleared, and never has to be paid. So it makes sense to hold on to an “appreciated” asset until you die, all else being equal.

There are people in DC who are seriously looking at eliminating the step-up, and either 1) making the heirs pay the capital gains tax when you die, or 2) making the heirs carry that future liability forward, the same way they would if you had given it to them while you were alive, so that they have to pay the capital gains tax later when they sell it. It is possible that neither of these options will pass, but it is also possible one of them will.

It is also very possible, you might even say likely, that the tax rate will increase. Right now, most people only pay 15% on long-term gains. I would not be shocked to see that percentage double.

But an increase in the capital gains rate, without an increase in the capital gains structure, is not necessarily a reason to give away assets to your heirs. It may be a reason to consider selling an appreciated asset, and paying the tax while it is still a relatively low percent, but giving it away wouldn’t accomplish anything.

Should I give away assets for Medicaid purposes?

This one isn’t really about a change in the law, it is just because of the increasing cost of long-term care. Even the Pioneer Homes charge a lot more than they used to, and the cost of a skilled nursing facility in Alaska is outrageous (several times more, in fact, than anywhere Outside). This causes a lot of people to consider giving away assets in order to qualify for Medicaid, since Medicaid can pay for long-term care.

But if you give away assets, and you apply for Medicaid within five years after that, Medicaid will penalize you. So in order to make this work, you have to give assets away well in advance.

And that is very dangerous, because if you give away assets and then you need assisted care within that five years, Medicaid will disqualify you for a certain time, depending on how much you gave away. That can still be a useful strategy, depending on the numbers, but if your heirs get into financial trouble and can’t pay for your care during that ‘penalty period’, you are up Ship Creek without a paddle.

So what is the upshot?

Chances are, giving assets away won’t be a good strategy for you. However, there are a number of exceptions.

Most of this depends on what Congress does, and of course nobody will know what that is until they actually pass something (and most likely, not for some time after that). Right now it’s just a guessing game.

If you are considering making these sorts of gifts, you should definitely not try to do this without getting guidance from somebody who understands the details of how these things work. If you don’t, you could definitely ‘step in a pile of it’. That might be too graphic a metaphor, but it’s apt.

Kenneth Kirk is an Anchorage estate planning lawyer. Nothing in this article should be taken as legal advice for a specific situation; for specific advice you should consult a professional who can take all the facts into account. If you’re not sure why, re-read that last paragraph.

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