Does the Gift Tax Apply?

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.

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.

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.

Please contact our office if you have any questions about how the gift tax may apply to your estate.