Source: http://blog.fwslaw.com/2012/11/
Timestamp: 2017-07-21 02:50:56
Document Index: 542094455

Matched Legal Cases: ['§529', '§529', '§529', '§529', '§529', '§529', '§529']

Plainly Legal: November 2012
Up to this point, Plainly
Legal has focused on topics dealing with the transfer of wealth, either through
lifetime gifts or at death. Today's blog takes a detour to discuss the question
of what happens with a person's debt when they die. Recently, a friend
contacted me with a question about information she received from someone at her
bank when she attempted to designate beneficiaries for her bank accounts. This
bank employee (I did not ask which bank or the job title of the employee) told
her that she should not designate a
beneficiary because, if she were to die
with debt that debt would then pass to her loved ones. Before continuing
with today’s blog, it is important to emphasize: THAT STATEMENT IS SIMPLY NOT TRUE.
The good news is that personal debt is
non-inheritable. If a person incurs debt during their lifetime, the beneficiaries
of the person’s estate, no matter if they are beneficiaries through a Will, Trust,
or the Intestacy Statutes, are not personally liable for any debt left behind.
This does not however mean that debt disappears at death.
When a person with personal
debt dies, that person's debt becomes the liability of the person's estate. Creditors
are then free to try to collect on that debt from the estate. It is the
responsibility of the Personal Representative (and Trustee) to pay the
enforceable debts of the deceased prior to making distributions to the
beneficiaries. To ensure that creditors receive payment prior to making
distributions beneficiaries, the Michigan Probate Code mandates that the
personal representative of the estate is required to publish a death notice (to
inform unknown creditors) and provide notice to known creditors. Those
creditors then have four months to present their claims to the Personal Representative.
After the four-month window, with some exceptions, the probate statute bars creditors’
claims against the estate. When a creditor makes a
claim against an estate it is the responsibility of the personal representative
to determine if the claim is valid and, if so, to provide payment to the
creditor. While the personal representative is responsible for making these
decisions, they do so in a fiduciary capacity and upon determining that a claim
is valid, pay the claim with the estate's assets. Absent extraordinary
circumstances, the personal representative is never personally liable to pay
the debts of the estate they represent. The practical result of this situation
is that a personal representative may determine that a creditor’s claim is
valid, but the estate lacks the assets to pay the debt. In that situation,
neither the personal representative nor any beneficiaries of the estate become
personally liable for the unpaid debt.
important to address a number of minor exceptions to these rules, the largest
of which being that the four-month claim window becomes a three-year window if
the Personal Representative fails to properly publish notice of the death or
fails to inform a known creditor of the death (a "known creditor" is
a creditor that's existence is known or reasonably discoverable by the personal
representative). A second common exception is that the four-month claim window
does not apply to any form of secured debt, such as a lien or mortgage. In
almost every circumstance, the holder of a secured debt has the right to
enforce their security agreement and take possession of the property in which
they have a security interest. For example, a bank may repossess a house that
is subject to a mortgage owned by the bank if the estate is unable to make
payments on the bank’s loan.
Since probate law requires
that creditors receive payment prior to distributions to almost all
beneficiaries (there are exceptions for a limited number of distributions to a
surviving spouse and minor children), it is possible that the estate assets can
be exhausted before a beneficiary receives anything from the estate. In the
event that the debts of an estate exceed the estate assets the beneficiaries receive
nothing, however those beneficiaries do not incur liability for unpaid debt
because of their status as beneficiaries. While it is the
responsibility of the estate to pay the deceased's debts prior to making
distributions there are certain assets that are never accessible to the
creditors of the estate, including retirement benefits and life insurance
proceeds. While creditors cannot attach the assets of a person’s IRA in order
to recover debt, once a person receives a distribution from the IRA, creditors
can attempt to recover those funds if the person deposits them in a bank or
other financial institution. When the owner of an IRA dies with debt the
distributions to the beneficiaries of an inherited IRA are protected from the
original owner’s creditors. This is true even if the IRA beneficiary is a Trust
We now reach the situation my friend
encountered on her trip to the bank. Unlike IRA accounts, beneficiary
designations on bank or investment accounts do not enjoy the same protection
from the original owner’s creditors. While a beneficiary designation causes
those accounts to pass directly to the individual named in the designation, such
designations do not limit the rights of creditors of the previous owner. This
does not mean that someone named as the beneficiary of a bank account becomes
liable for the original owner’s debts. In practical terms this means that a
creditor can recover assets in a bank or investment account transferred via
beneficiary designation, but that creditor still may not recover in excess of
the assets transferred from the deceased individual.
Substantial debt is an
understandable concern for many people these days. It is important to remember
that when you or your loved ones die, personal debt generally becomes the
responsibility of the deceased person’s estate, for the Personal Representative
to pay before making distributions to other beneficiaries. Payment of these
debts can consume the assets of an estate, but in that circumstance the
beneficiaries are not liable for debt in excess of the estate’s assets.
It is just as important to consult reputable
source when dealing with debt as it is when making decisions regarding other
planning. While employees of financial institutions may seem like knowledgeable
sources of information, you should be aware that not every employee receives
the same training. If you have doubts as to the accuracy of information you
receive, ask to speak with a manager, contact your attorney for a second
opinion, or send us a message and we will attempt to address your issue, directly
or in an upcoming blog. Posted by
A Charitable Lead Trust (CLT) functions similar to a CRT but provides for the charity in the “here” by giving the charity the current income stream from assets transferred to the trust and for other beneficiaries in the “hereafter” by distributing the remainder portion to family members after a specified time or your death. Again, the amount of the income tax deduction for contributions to the CLT is determined using IRS tables. The longer the period the charity gets the income from the trust property, the smaller the gift to the remainder beneficiaries, and the larger the deduction you are able to take. However, tax rules require you pay tax on the income as the charitable beneficiary receives in order to take the immediate charitable income tax deduction. By making use of a CLT, you can fulfill your charitable inclinations, shift income and assets to eventual beneficiaries with little gift tax cost, and remove assets form your estate. The CRT and the CLT both serve as excellent methods of charitable giving as part of a larger estate plan. If however your charitable inclinations include a long-term, active charitable commitment, it may be appropriate to consider organizing your own Charitable Foundation. While creating and maintaining a Foundation requires substantial administrative effort, the use of a Foundation allows you to receive charitable tax deductions, manage the long-term distribution of assets, choose and change which charities benefit from your philanthropy, and potentially provide a vehicle for a multigenerational commitment to doing good works.
From Alan, Matt, and everyone at Finkel Whitefield Selik, have a safe and happy Thanksgiving.
Take the time to enjoy time with friends and loved ones, enjoy a parade, root on the Lions, and give thanks.
Also if you decide to deep fry your turkey, make sure to take special care. Desire for a delicious dinner shouldn't result in a fire ball.
If you have any problems today, hopefully the kind people at 1-800-BUTTERBALL can be of assistance. Posted by
Exploding Turkey,
As we have discussed in previous posts, there are many forms of trusts used in
the estate planning process. A special type of trust, known as an “IRA Trust,” is
a stand-alone trust, separate from a Living Trust that acts as the beneficiary
of IRAs or retirement benefits. The provisions of an IRA Trust satisfy all of
the regulations related to the distribution of IRAs and retirement benefits,
allowing the beneficiaries to take advantage of their inherited benefits over
their lifetime. While there is nothing barring a
Living Trust from being the beneficiary of an IRA, due to the regulations that
govern the distribution of retirement benefits it may be difficult if not impossible
to take advantage of the most beneficial distribution rules or provide for a
lifetime distribution of benefits using only a standard Living Trust. For
example, if the Living Trust beneficiaries include charities the Living Trust will
not qualify as an "individual beneficiary" and thus the
non-charitable beneficiaries will not benefit from the ability to “stretch out”
the IRA benefits. In addition, if the Living Trust benefits elderly relatives,
the shorter life expectancy of those relatives limits the ability to stretch
out distributions and delay or defer income taxation for younger beneficiaries because
the regulations base MRD on the life expectancy of the oldest beneficiary. The
provisions of an IRA Trust avoid these problems and ensure that the IRA Trust’s
beneficiaries enjoy the greatest benefit from their inherited asset.
The beneficiaries of the IRA Trust can
be the same as those of the client's Living Trust. However, the distribution
terms of an IRA Trust terms are often different from the Living Trust and frequently
more restrictive in order to ensure that no matter what happens to the Living
Trust assets, the IRA Trust assets will be available to help support children,
grandchildren and other beneficiaries. Alternately, an IRA Trust can divide
assets between different groups of beneficiaries. For example, the Living Trust
may benefit a second spouse while the IRA Trust has children and grandchildren
as beneficiaries. Finally, an IRA Trust can help beneficiaries in more
difficult or complex situations, such as beneficiaries who are:
and unable to handle money
with creditor issues
with bad marriages
care needs children, including those who qualify for government benefits
surviving spouse who is unable to say no
when children ask for money
In these situations, the IRA Trust Trustee can provide professional management of Trust assets, allowing the IRA assets to grow tax deferred, except for required distributions, and ensure that the beneficiaries do not waste those distributions.
If there are multiple beneficiaries, IRA
Trusts are drafted and coordinated with the beneficiary designation of the IRA
to allow each of the beneficiaries to use their own life expectancy in
determining the minimum required distributions. For example, the beneficiary
designation after the death of the client should read as follows: “50% to the
sub trust for the benefit of Jane Doe under the John Doe IRA Trust.” With
proper drafting, an IRA trust can provide not only for children, but
grandchildren and beyond, allowing multiple generations to take advantage of
the IRA benefits. In those circumstances, the IRA Trust is often known as a
"Dynasty Trust" because it can provide for multiple generations. Just like a Living Trust, the
distribution provisions of an IRA Trust dictate how the beneficiaries receive
distributions. One design option for an IRA Trust is the "conduit
trust", under which the trustee has no power to accumulate plan
distributions in the trust and must allocate any distribution received from the
IRA or retirement plan to the beneficiaries. The conduit trust lessens the
trustee’s ability to control the income but still allows control over principal
distributions as necessary. Alternatively, when it is desirable or
necessary to impose greater control upon the dispersal of the RMD, an "accumulation
trust" allows the trustee to hold the RMD in trust for the beneficiary’s benefit.
For example, if the beneficiary of the IRA Trust is special needs child, it is
important to limit income distributions in order to avoid adversely affecting
the beneficiary's right to receive state or federal benefits. It is important
to remember however when using an accumulation trust that the federal
government taxes income received from the IRA but not distributed to
beneficiaries according to the potentially higher trust income tax rates.
Whether a client wants to provide for
multiple generations, ensure a lifetime of income for a beneficiary in a
difficult personal or financial situation, or simply ensure that different
groups of beneficiaries receive the asset that provides them the greatest value,
an IRA trust is an extremely useful tool for a wide variety of situations. Due
to the complexities surrounding IRA and retirement plan distributions, it is
important to work with experienced estate planning attorney familiar with those
regulations in order for an IRA Trust to achieve a client's goals.
2012 Tax Planning - Splitting Inherited IRAs For individuals who inherited a share
of an IRA from an IRA owner who died in 2011, December 31, 2012 is an important
deadline. This is because the regulations that govern distributions from inherited
IRAs require that beneficiaries make decisions regarding the division of
inherited IRAs on or before December 31 of the year following the death of the
IRA owner. When there are multiple beneficiaries for an inherited IRA,
splitting the IRA account into separate accounts for each of the beneficiaries
has the potential to yield important tax and investment benefits.
beneficiaries of an IRA must take distributions from the IRA either (1) fully
within five years or (2) in annual distributions over their life expectancy. The
regulations that govern IRA
distributions require that, whether the IRA owner died before or after his
required beginning date (generally age 70 1/2), if the IRA owner was older than
the beneficiaries, the remaining IRA balance is paid out over the remaining
life expectancy of the beneficiary. Generally,
when there are multiple beneficiaries of a single IRA, those beneficiaries must
use the life expectancy of the oldest amongst them (i.e. the shortest
life expectancy) when calculating the Required Minimum Distributions (RMDs). This requirement places younger beneficiaries at a disadvantage because the
inherited IRA makes larger annual distributions over a shorter time, triggering
potentially greater income tax liability. For example, John designated his
children, Bill and Mary, as equal beneficiaries of his IRA. John dies in 2011
at the age of 75 when Bill is age 55 and Mary is age 40. Under the default
scenario, Bill's life expectancy dictates the RMDs for both Bill and Mary.
Presuming they each are entitled to $500,000 from the account, in the first
year the RMD using Bill's life expectancy is almost $17,000. If Mary could
calculate the distribution using her life expectancy, her initial distribution
would be only about $11,500. The size of the distributions will only accelerate
as Bill gets older.
for those younger beneficiaries, if they take advantage of the distribution
regulations in a timely manner, they can split the IRA into separate accounts
and the RMD rules will apply separately to each account. Following the split,
each beneficiary will use their own life expectancy in determining the RMDs.
Thus, Mary’s required distributions will be smaller than if she were required
to use Bill's life expectancy. In addition, Mary would also have more freedom to
invest her portion of the IRA, as her investment philosophy is likely to be
more aggressive than Bill’s due to the difference in their ages.
order to take advantage of this opportunity, recent IRA beneficiaries must
direct the IRA trustee to split the inherited IRA into separate and equal IRAs
no later than December 31, 2012, making each individual the sole beneficiary of
their share of the IRA. Additionally, the trustee must allocate all
post-death investment gains and losses for the period before the establishment
of the separate accounts to each account on a pro rata basis in a reasonable and consistent manner. After
establishing separate IRA accounts, each account owner can provide for separate
and distinct investments depending upon the needs of the beneficiary's with gains
and losses from the investment of the account allocated only to that account. Time
is running out for the beneficiaries of IRAs inherited in 2011 to make this
decision. It is important that beneficiaries and their financial advisors
communicate regularly to ensure the ability to take advantage of opportunities
such as this. The law governing IRA distributions is both long and complex.
This article addresses only the potential to split inherited IRAs into separate
accounts for each beneficiary, if you have additional questions or concerns
regarding IRA distributions please feel free to leave us a comment, send us an
a September 2011 poll, conducted by NPR, the Robert Wood Johnson Foundation,
and the Harvard School of Public Health, less than 5% of adults considered
Medicaid when asked how they would pay for long-term elder care. This
stunningly low number sheds light on the fact that while people are living
longer and are more aware of the potential need for long-term care as they age,
they are unaware of an important method of paying for that care.
is a federal program, administered by the states, that pays for nursing home
care for individuals who meet the program’s medical, income, and asset
requirements. The current average yearly cost of nursing home care in Michigan
exceeds $85,000 for a private room. At that rate, even a period of two to three
years will deplete the savings of the average person, leaving any surviving
spouse with little money to use for their own care. If however, an individual
is eligible for Medicaid benefits, the program covers the majority of that
cost. The phrase "Medicaid Planning" has become a catchall for the
methods used to allow an individual to qualify for Medicaid benefits, while
preserving a greater portion of their assets for the well-being of their loved
ones. As a
potential applicant contemplates whether to engage in Medicaid planning it is
important to consider to consequences and benefits of qualifying for Medicaid.
The largest benefit is the applicant’s assets are not consumed by years of
expensive medical bills. For a married couple, this insures that the spouse who
is not in need of nursing home care has the assets to provide for their own
needs. For a single applicant, Medicaid Planning can result in more of the
applicant’s assets being passed on to their loved ones. The
consequences of qualifying for Medicaid include the need to leave a home and
reside in a nursing home. When faced with that reality, many potential applicants
realize that staying in their own home is more important than passing assets to
their children. A second often forgotten consequence is that while Medicaid
pays for a great deal, if an applicant needs to spend assets in order to
qualify for Medicaid, those assets are not available if they are needed for
some reason in the future.
for Medicaid benefits is not something to engage in lightly, especially for
potential applicants who presently have significant assets, which they could use
to pay for care. Proper Medicaid planning is more than spending, giving away,
or attempting to protect assets to reach Medicaid’s eligibility requirements.
The rules governing Medicaid eligibility consider more than a person’s present
financial condition and impose a penalty period of Medicaid ineligibility if the
applicant divests wealth to become eligible for Medicaid. The Department of
Human Services (DHS) "looks back" 60 months from the date of a
person’s application for benefits to determine if that person has given away
assets that would impose a penalty on eligibility. There are however ways to
spend down assets legally to reach the eligibility threshold. The first
and easiest method requires the client to own a home. DHS considers a single
home an exempted asset when determining whether a person meets the asset
threshold for Medicaid benefits. The personal property within that home is also
exempt. Therefore, a person can pay off mortgages, make necessary repairs, make
improvements to the home to increase its value, and purchase new furnishings.
All of these techniques are especially useful if one spouse of a married couple
needs to take advantage of Medicaid. In addition to the home and personal
property, a single car is an exempt asset, this is true even if the applicant
never drives the car. Another item that DHS classifies as an exempt asset when
determining eligibility for Medicaid, as a pre-paid funeral contract. While
many people find it difficult to even think about planning their own funeral,
but by taking the time to make those decisions that will eventually become
necessary, a Medicaid applicant can both ease the burden on their love ones
after their death and remove assets to help qualified for Medicaid. While
spending down assets is a viable method of reaching the Medicaid eligibility
threshold when an applicant has few assets, there are times when an applicant
desires to qualify for Medicaid, frequently because they are aware that their
condition is likely to be prolonged and expensive, leaving them with nothing to
pass on to their loved ones, that require more advanced planning. While it
is possible to engage in planning that will assist a potential applicant in
becoming Medicaid eligible, the scope of that planning varies greatly based
upon the applicant’s present circumstances. Different methods are used when the
applicant has a living spouse who is not in need of Medicaid benefits than
would be used for a widowed applicant. Furthermore, in a situation where both
spouses will potentially require substantial long-term care, still other
methods can assist in preserving more assets to pass on to beneficiaries. The
complexity of this advanced planning makes it unsuitable to discuss at length
in this forum. In addition, potential applicants are cautioned not to attempt
such advanced planning without consulting an attorney versed in Medicaid
Medicaid planning is a complex area of law,
but one with potentially large benefits. Whether a person needs additional care
in the near future or simply is aware of the potential need for that care later
in life, the proper preparations today, including a complete estate plan, a
plan for regular annual gifts, and understanding the pros and cons of the
Medicaid program, can insure that any long-term elder care does not leave their
loved ones in dire financial straits. Posted by
we assist a client preparing their estate plan, we must be aware of a number of
factors, one of which is a desire to minimize the amount of assets subject to
the Federal Estate Tax. The Federal Estate Tax is the tax levied when the
estate of a decedent transfers assets to beneficiaries. Currently the first
$5,120,000 transferred is exempt from taxation (this is the “Estate” portion of
the Estate and Gift Tax Lifetime Exclusion). The value of gifts (other than
"Annual Exclusion" gifts which will be discussed later) that the
decedent made during their lifetime reduces the $5,120,000.00 exclusion dollar
for dollar (this is the “Gift” portion of the Lifetime Exclusion). After a
person has exceeds the $5,120,000.00 mark, further gifting (either during life
or at death) results in a tax liability. Keep in mind, each person has their
own Lifetime Exclusion, so married couples can transfer more than $10,000,000.00 before incurring any tax liability, and the present law
even allows a widow to use their deceased spouse’s unused Exclusion. For
most clients, knowing that they need to give away $10,000,000 before the IRS comes
knocking is reassuring. It means that even if they succeed in accumulating a
substantial estate, they can make gifts with little worry about paying anything
extra in taxes. You likely remember however that the current $5,120,000
Lifetime Exclusion is scheduled to decrease to $1 million beginning in 2013. In
addition, the top tax rate for gifts is scheduled to increase from 35% to 55%. If
Congress does nothing and the default outcomes occur, this change will pace increased
emphasis on clients addressing their lifetime gift planning now. Last
week we addressed the possibility of making large lifetime gifts before the
end of the year in order to take advantage of the current Estate and Gift Tax
Lifetime Exclusion. It is important that clients look at those options before
the end of the year. However, even if a client is not interested in making
large gifts, the client can benefit loved ones by making gifts using another exclusion,
the Annual Gift Exclusion.
Gift Tax Exclusion allows a person to make gifts of $13,000 or less to as many
people as they desire each year, whether or not they are related, without
incurring any tax liability and without using any portion of the Lifetime
Exclusion. This means that a person with two children and four grandchildren
could make Annual gifts of $13,000 to each of those people (totaling $78,000)
without using any of their Lifetime Exclusion. As with the Lifetime Exclusion,
the Annual Gift Exclusion is unique to each person, so a married couple can
each make gifts to children and grandchild (using the example above a married
couple can give away $156,000 each year without incurring any tax liability).
While clients only should make such gifts if they are comfortable they have
sufficient assets for their own needs, a
schedule of regular gifting can reduce the assets of person to the point where
their estate has minimal tax liability. For
clients that worry that making substantially lifetime gifts will negatively
effect their beneficiaries, due to concerns over addiction, problem marriages,
or even a concern that the beneficiary will work less due to the Annual gift,
additional planning can allay these concerns. A
primary tool to delay a beneficiary’s access to gifted funds is an Irrevocable
Trust for the beneficiary’s benefit. The client makes the annual gifts to the Trust,
thus limiting the beneficiary’s use of the gift subject to the terms of the Trust.
Frequently, the terms of the Irrevocable Trust are similar to the terms of a
client’s Living Trust, such that a beneficiary is able to request funds from
the trustee for a limited number of reasons and then receives distributions of
principal following the client’s death. A
gift to an Irrevocable Trust for a beneficiary must be a "present
interest" in order to qualify for the Annual Gift Exclusion. This means
that a beneficiary must have the right to immediately take possession of the
gift and use the gift as the beneficiary pleases. However, by using a “Crummey
Notice” a client is able to side step this limitation. As we have previously discussed
while discussing Irrevocable
Life Insurance Trusts, a “Crummey Notice” informs a beneficiary of their
right to withdraw the Annual gift for a limited period of time, otherwise that
gift becomes part of the trust for the beneficiary’s benefit. Most
beneficiaries are aware that future gifts may be conditional upon the
beneficiary's willingness to let the "Crummey Notice" period lapse and
allowing the gift to be held in trust. For minor beneficiaries “Crummey
Notices” are signed by Guardians, thus for clients making gifts only to their
own minor children, husbands may sign the “Crummey Notice” for the wife’s gift
and vice versa. An
additional tool for gifting to minor children is the §529 Education Savings
Plan. The primary advantage of a §529 plan is the earnings of the plan are
not subject to Federal Income tax and generally not subject to State Income tax
when used to pay for “qualified education expenses” including tuition, books,
computers, and room and board. While contributions to such plans are not
deductible from Income tax purposes, §529 plans do allow individuals to pre-pay
up to five years of contributions in one year, which will count as gifts made
in the current year and the following four years. Using the example above, the
couple with four grandchildren can contribute $130,000 in the first year to a §529
plan for each grandchild, totaling $520,000). §529 plans are flexible and there
is no penalty for changing the beneficiary from one family member to another or
for combining §529 plans with the same beneficiary. When clients desire to
provide for education of family members and have the ability to pre-pay contributions, §529 plans are
an excellent part of a schedule of regular gifting.
final method of gifting involves the direct payment of medical care and tuition
expenses. Using this method, a person may make unlimited payments, directly
to a school or medical provider, for the benefit of another person. Gifts made
in this fashion do not count toward either the Annual Exclusion or the Lifetime
Exclusion. The Internal Revenue Service broadly defines the meaning of
medical care to include not only diagnosis, treatment, and prevention of
diseases but also payments for transportation to such care and payments for
qualified long-term care services. Tuition gifts
can pay for both private and public institutions and are not limited to college
tuition, private primary and secondary school tuition is also payable. The key
for a client making use of this method of gifting is making payment directly to
the school or medical provider. As
we have said both earlier in this post and in discussing large lifetime gifts,
before making any gift it is important to consider the consequences of that
gift. Clients should consider the impact on their own lives, the chance that
they will need the gifted funds later in life, and the impact on the
beneficiary receiving the gift to determine if the benefits of gifting outweigh
the potential consequences. Using the Annual Gift Tax Exclusions and the
Lifetime Estate and Gift Tax Exclusion may require the filing of Gift Tax
Return, and making gifts to and
Irrevocable Trust requires the existence of a valid trust, so clients should
make sure to include their attorney and tax professional are a part of the planning
process. Annual gifts are an effective way to pass assets on to future
generations without the expense of additional tax liability. The sooner a
client begins a regular gifting program, the more effectively they can make use
By taking advantage of the higher Lifetime Exemption in 2012, clients can make gifts to children and other beneficiaries without any out-of-pocket cost for Gift Tax. In addition, gifts in 2012 can save future estate taxes by removing future appreciation on the gifted assets. Gifts made to multiple generations (e.g. children, grandchildren, etc.) this year, also can avoid any Generation-Skipping Transfer Tax. While taking advantage of this strategy has the potential to reduce the taxes imposed upon large estates, the "tax tail should not wag the dog". This means that achieving a client's goals for their estate plan should take priority over the desire to avoid paying taxes. Before the client takes the steps necessary to utilize this strategy, it is important to ask the following questions:
The client should be careful about gifting any assets they may need to maintain their lifestyle later in life. What is given away cannot be returned without incurring gift tax, income tax and estate tax consequences. The client must be comfortable with giving up control and the use of the asset, subject to restrictions that can be placed on a beneficiary's use. If the client can afford to make a large gift and is comfortable doing so, it is probably advantageous, especially if the tax rates increase from the current 35% maximum bracket to the 55% maximum bracket, as is scheduled in 2013, and the lifetime credit drops to $1,000,000.00. Presuming appreciating assets, heirs can receive significantly more in assets and appreciation from a large gift in 2012 rather than after-tax distributions at death. Two words of warning, first under current law, the donee of a gift receives the donor's income tax basis in the gifted property, while the beneficiary of most inherited property will receive a "step up in basis" to the date of death fair market value of the inherited property. While making a gift may avoid Estate Tax, it may also create additional capital gains income tax when the asset is later sold. Consideration of the income tax consequences should be part of the pre-gifting analysis. Second, there is the possibility that there will be a "tax clawback" in future legislation. That is, an added Estate Tax that takes back some of the tax-free benefits of the 2012 gifts. In the current law, it is not clear that gifts made in 2012 using the larger Lifetime Exemption cannot be added back to the estate of a client who made large gifts, resulting in the imposition of a larger Estate Tax burden at death if the exemption is only $1,000,000 at the time of death. If the client is inclined to take advantage of the current legislation, there are a number of strategies for using the current lifetime exemption to make large gifts, including: