CHRISTMAS IN JULY

Who doesn’t love to receive a gift? And, isn’t it better to give than to receive? And, isn’t Christmas just around the corner? Enough already! What we are talking about this month is gift-giving. Not those plastic airplane models that Uncle Roy used to send us, but the real deal- cash. This month we will explore gifts to people, and next month we will look at gifts to charities.

As with most everything, there are rules to follow. If you plan to give someone a few dollars for a birthday or a graduation, just do it. But, if your intentions are to make substantial gifts of thousands of dollars in order to shrink your estate, there are some things you should think about.

First, any person can give another person a cash gift of up to $12,000 in 2007 without any income tax consequences, gift tax consequences, or estate tax consequences. Sounds good so far, doesn’t it. There are a few “buts” though.

One is that the gift giver (“donor”) cannot deduct the gift on this year’s income tax return. Nor does the recipient (“donee”) have to include the gift on this year’s return. The reason is simple- a gift is not income. So far, so good.

Another “but” arises when a couple of parents want to give more than $12,000 to a child or grandchild. This brings up the concept of joint gifts, or gift splitting. A couple can jointly give $24,000 to a child in a given year. But, that means no more cash gifts that year. Not for birthdays, anniversaries or Christmas. At least not by check.

Still another “but” is the circumstance where the donor dies within a year after making the gift. Here in Pennsylvania that means that some of the dollar value of the gift has to be included in the estate of the decedent for Inheritance Tax purposes. That does not mean that the money has to be paid back. It only means that some more tax has to be paid to the state based upon the amount of the gift and the tax rate of the donee. For instance, let’s say your mother gave you a gift of $6,000 in April. Then she passed away in September. On her inheritance tax return, the $6,000 would be reported, as it would be deemed to be a “gift in contemplation of death,” and it would raise the amount of her estate, thus causing the amount of tax to increase.

Yet, another “but” comes up when the donor goes to a nursing home and applies for Medicaid because he or she has run out of money. The Department of Public Welfare will investigate whether any gifts were made, and if the result of that investigation shows substantial gifts made within the five (5) preceding years, that could result in the DPW denying to pay for nursing home care.

Now, let’s move on to the high rollers. And, by that, I don’t mean the curlers on top of your head. I mean the people with lots and lots of money. I call these folks the “two comma” people, because their portfolio usually has two commas in it, which means they have over a million dollars. What do they do if they want to reduce the size of their estate? Gifting is one way to do it, but there are some more rules to understand in order to do it right.

What happens, for instance, if they have four million dollars, and they are convinced that they have more than enough money to take care of themselves all the way to the finish line? Well, they can use the $12,000 annual exclusion gifts, but those are too small and too slow to have much of an impact. In cases like this, they can make a major gift of up to one million dollars in a lifetime.

The impact on a portfolio can be significant. Not only does the portfolio shrink by a million dollars, but that money is no longer invested and producing more money. By cutting the estate down by that much, the heirs can save up to $450,000 in terms of estate tax, inheritance tax and probate costs.

As you might expect, though, it takes a very open mind on the part of a donor to get him or her to part with that kind of money. And, many factors play into the scenario, like whether the children are all to be trusted and treated equally. These and other important topics should be discussed and considered before embarking on a major gift giving program.

In conclusion, there are quite a few rules and consequences involved in making substantial gifts. If you or someone you know has a sizeable estate and is looking for ways to reduce or eliminate some death taxes and probate costs, consult an estate planning attorney for guidance and advice.

Christopher M. Abernethy has been practicing law in Hampton Township since 1976. He focuses on elder law, which includes wills, trusts, powers of attorney, living wills, and probate matters. He also is proficient in all aspects of real estate law and business law. He is a member of the National Association of Elder Law Attorneys, and the AARP Legal Services Network. He can be reached at 412-486-6624 or by email at cabernethy@aaylaw.com.