Short-Cuts to Estate Planning can Lead to Costly Consequences

It seems like a simple way for the children to manage mom’s finances: add the grown children as owners to a bank account, brokerage account or make them joint owners of the home. However, these short-cut methods create all kinds of problems for the parent’s estate and the children themselves, says the article entitled “Estate planning: When you take the lazy way out, someone will pay the price” from Florida Today.

By adding an adult child as owner to the account, the child is being given 50% ownership. The same is true if the child is added to the title for the home as joint owner. If there is more than $30,000 in the account or if the asset is valued at more than $30,000, then the mother needs to file a gift tax return—even if no gift tax is due. If the gift tax return is not filed in a timely manner, there might be a gift tax due in the future.

There is also a carryover basis in the account or property when the adult child is added as an owner. If it’s a bank account, the primary issue is the gift tax return. However, if the asset is a brokerage account or the parent’s primary residence, then the child steps into the parent’s shoes for 50% of the amount they bought the property for originally.

Here is an example: let’s say a parent is in her 80s and you are seeing that she is starting to slow down. You decide to take an easy route and have her add you to her bank account, brokerage account and the deed (or title) to the family home. If she becomes incapacitated or dies, you’ll own everything and you can make all the necessary decisions, including selling the house and using the funds for funeral expenses. It sounds easy and inexpensive, doesn’t it? It may be easy, but it’s not inexpensive.

Sadly, your mom dies. You need some cash to pay her final medical bills, cover the house expenses and maybe a few of your own bills. You sell some stock. After all, you own the account. It’s then time to file a tax return for the year when you sold the stock. When reporting the stock sale, your basis in the stock is 50% step-up in value based on the value of the stock the day that your mom died, plus 50% of what she originally paid for the stock.

If your mom bought the stock for $100 twenty years ago, and the stock is now worth $10,500, when you were added to the account, you now step into her shoes for 50% of the stock—$50. You sold the stock after she died, so your basis in that stock is now $5,050—that’s $5,000 value of stock when she died plus $50: 50% of the original purchase. Your taxable gain is $5,450.

How do you avoid this? If the ownership of the brokerage account remained solely with your mother, but you were a Payable on Death (POD) or Transfer on Death (TOD) beneficiary, you would not have access to the account if your mom became incapacitated and had appointed you as her “attorney in fact” on her general durable power of attorney. What would be the result? You would get a step-up in basis on the asset after she died. The inherited stock would have a basis of $10,000 and the taxable gain would be $500, not $5,450.

A better alternative—talk with an estate planning attorney to create a will, a revocable trust, a general durable power of attorney and the other legal documents used to transfer assets and minimize taxes. The estate planning attorney will be able to create a way for you to get access or transfer the property without negative tax consequences.

Reference: Florida Today (May 20, 2021) , “Estate planning: When you take the lazy way out, someone will pay the price”

I Want to Make a Generous Gift but the Taxes?

That’s the short answer to the question, which is often asked in a roundabout manner: “How much am I allowed to gift?” There are more details in the complete answer, as reported in The Mercury’s article, “Can I gift more than $15,000?” You can gift as much as you wish, to whomever you wish, but you do have to know the tax implications.

A total of $10,000 used to be the annual exclusionary gift amount, which is now $15,000. However, that figure has less significance than it used to have.

In 2019, the annual exclusionary gift limit is $15,000. If you give away up to but no more than $15,000 in a calendar year to one or more individuals, whether that gift is in cash or any property of value, you don’t have to file the federal tax form, known as Form 709. If you gift more than that amount, you need to file that form.

However, the taxpayer for a gift tax form is the person who gives the gift, and not the person receiving the gift.

If you gift more than $15,000, it doesn’t necessarily mean that you have to pay a Federal gift tax. It’s actually unlikely, even if you have to file the form.

Here’s another point: it’s actually pretty easy to give away more than $15,000 and not have to exceed the annual exclusionary amount, and even technically being required to file a Form 709. How is that possible?

You are permitted to gift an unlimited amount to your spouse, as long as your spouse is an American citizen. The rules are different for non-citizens.

If you are married and want to help out a child who is also married with children, you and your spouse may gift $15,000 each to your son (there’s $30,000) and also to your son’s spouse (another $30,000) and to each of your son’s children, however many grandchildren you may have. If you want to compound your gifting, you can make that same gift every year.

The federal estate and gift tax are “unified.” This allows you to give away any property above the annual exclusionary gift amount or for your heirs to inherit a total of $11.4 million currently, without paying gift or estate taxes. Unless your combined lifetime estate giveaways are subject to gift tax and your estate on death is valued at more than $11.4 million, there’s no need to worry about that gift tax.

There are other ways to be generous. If you pay for someone else’s medical care (and pay directly to the medical care provider, not to the person), or for someone else’s college tuition (pay directly to the college and not to the person), you can give an unlimited amount to that person, without having to file a gift tax form or making a gift tax payment.

Charitable gifts are also except from the reporting requirement, providing that no interest in the gifted assets is retained by the person gifting.

There are several reasons why you might want to file a gift tax return. One might be to keep track of the value of the gift at the time it was given. If the asset has increased in value since the purchase, both you and the party receiving it may need to track its value, as of the date of the gift. This is the concept known as basis. If the person sells the gift, this will be necessary to determine federal taxes regarding profit or losses.

An experienced estate planning attorney will be able to help determine how gifting can fit in with your overall estate plan. Every situation is unique, and you want to be sure that your gifting strategy fits in with creating a legacy and tax planning.

Reference: The Mercury (June 26, 2019) “Can I gift more than $15,000?”