Summary: Each person's set of estate planning goals can be as unique as the person creating a plan. How you utilize gifts as part of your overall estate planning, or whether you will use them at all, can depend on a wide array of considerations that are a mixture of the legal and the personal. For those that may desire to include gifting in their estate planning, there are many possible benefits that they can realize, but there are downsides as well, if the gifting plan is not carried out carefully.
When people start to consider an estate plan, some approach this prospect with the idea that the best use of their assets is to save those assets during their lifetimes, or use them themselves, and then distribute what remains upon their death. For others, though, the greatest enjoyment of their wealth is derived from giving a portion of it away during their lifetimes. You can realize substantial benefits from using gifting in your estate planning, but it is essential to make sure that the gifting plan you undertake does not entrap you in one or more of the potential pitfalls that exist.
One of the first things to consider is making sure that your gifting plan doesn't create negative tax consequences. Federal tax law sets the annual gift tax exclusion at $14,000. This means that you can give up to $14,000 to as many people as you want and those are not considered to be taxable gifts for purposes of federal taxes. If you give somebody more than $14,000 in a year, this generally constitutes a taxable gift for federal tax purposes. There are certain exceptions to this, though, like tuition or medical expenses, or gifts to a spouse.
It's important to be aware that you do not have outright give an asset to someone for free for it to qualify as a gift under the federal law. For example, if you sell your SUV that has a fair market value of $40,000 to your daughter for $20,000, the federal tax laws view this as a $20,000 gift to your daughter. This is, of course, more than the $14,000 limit and would be a taxable gift for federal taxes. Another thing that can trigger a "taxable event" is adding someone to your deed. Say, for instance, you decide, as a means of avoiding probate, to alter the deed on your $250,000 home by "adding" your son, making the two of you joint tenants with right of survivorship. In this example, let's also assume that you receive no money from your son for this transaction. One of the consequences of this is that you have, under federal tax rules, made a gift to your son in an amount equal to 1/2 of the value of that home, or $125,000. (There are, of course, potentially less pitfall-filled ways to deal with this home and still avoid probate, such as a revocable living trust or a transfer-on-death deed.)
If you are also planning for Medicaid eligibility, it is vital to be especially careful. While the IRS allows you (as mentioned above) to make as many gifts in a year as you want so long as each one is $14,000 or less, the rules for Medicaid qualification are more strict. Even those gifts that are covered by the federal gift tax exclusion may possibly lead to a period of Medicaid ineligibility (a/k/a a transfer penalty) depending of the specific details of that asset transfer.
If you want to engage in the gifting of assets as part of your estate planning, be sure to work with an experienced estate planning team, who can help guide you through the process and make sure that your generosity in the present term will not cause you or your loved ones problems in the future.
This article is published by the Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services-company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at www.legacyassuranceplan.com.
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