Who Gives? Increasingly, clients are interested in gifting assets, usually to children and grandchildren. This is part of the normal transfer of wealth from one generation to the next generation. Parents and grandparents make continual and regular gifts to children and grandchildren, generally as holiday presents or to meet special needs such as medical bills or college expenses.
Sometimes large gifts are contemplated as part of estate planning. This month we will touch on some of the motivations and rationale for gifting - usually larger amounts than a normal Christmas gift.
Estate and Gift Taxes. Clients typically make annual gifts to take advantage of the annual gift tax exclusion, now $13,000 per donee per year. In addition, an individual is allowed to make a $1.0 million lifetime gift, free of gift tax. Gifts in excess of that amount are subject to gift taxes and, in our experience, are almost never done. Lifetime taxable gifts (part of the $1.0 million) are deducted from the $3.5 million per person federal estate tax exemption, in calculating whether a federal estate tax is due on death.
As part of overall estate and tax planing for clients with individual net worth in excess of $3.5 million, or married couples with combined net worth in excess of $7.0 million, we urge clients to take advantage of the $1.0 million gift tax exemption with gifts outright or in trust of assets that are likely to appreciate or to take advantage of current low values. Often we recommend and analyze more exotic techniques such as a Qualified Personal Residence Trust (QPRT), Charitable Trusts or Grantor Retained Annuity Trusts (GRATS), which are beyond the scope of this summary. Suffice it to say that where preservation of wealth is concerned and federal estate taxes are a likely possibility based on total net worth, we urge clients to consider employing some of these strategies to transfer wealth at little or no transfer tax (gift or estate).
Transfers to Spouses. Transfers to spouses are not subject to gift or estate tax, the theory being that those assets may be subject to estate tax at the spouse�s death. However, many times where there is substantial disparity in wealth between spouses, we can arrange special spousal trust gifts so that the donor can retain an element of control and that there is no tax when the trust is created or when the spouse dies. Lifetime planning is not a function of age. Married couples of any age should investigate these possibilities.
Medicaid Qualification. Gifting of assets has been a common technique in Medicaid planning where there is a possibility or likelihood that a person, parent or spouse may require nursing home care. Medicaid rules and regulations became much more strict with the Deficit Reduction Act of 2005. Therefore, for most people, we organize asset gifts at the time a donor is admitted to a nursing home, in order to protect as much wealth as possible and still qualify for Medicaid. Generally, advance gifts are not recommended. (As a side note, we can still protect assets of a married couple in Michigan.) Caution: All gifts are now taken into account in creating Medicaid penalties (delay in eligibility), unless the donor can prove that the gifts were not made for Medicaid planning. This proof is fact dependent and is an additional obstacle to overcome for annual gifts, payments for college expenses, etc.
Medicaid Exception. Where a considerable amount of wealth is involved and nursing home care is forecasted, we do intricate asset planning and often employ irrevocable trusts (which I call ProTec Trusts) in order to get past the Medicaid five year look back for gifts.
Veterans Assistance. Direct gifts or gifts in trust can be made for purposes of qualifying a Veteran for Aid and Assistance pension benefits. We are seeing more WWII Veterans and Korean Veterans over 65 requiring Assisted Living or Adult Foster Care assistance. There is no comparable look back provision for veterans benefits as there is in the case of Medicaid. Trusts are generally the most common and effective way to protect assets where pension benefits for a Veteran or spouse or widow of a Veteran is involved.
Asset Protection. There is increasing interest in asset protection against creditors claims. Asset protection sometimes takes the form of special trusts, which requires sophisticated planning.
An overriding concern in asset protection planning is the possibility that the transfer will be deemed a fraudulent conveyance. Under the laws of most states, including Michigan, a fraudulent conveyance, a gift or transfer designed to defraud creditors, can be avoided and the assets reclaimed from a transferee by a judgment creditor.
Many states have adopted favorable laws to protect trust assets from creditors so long as the creation of the trust is not deemed to be a fraudulent conveyance.
Asset Protection Trusts, in states with favorable laws, are becoming increasingly popular for individuals with substantial wealth. In most cases, these individuals no longer have to look to off shore trusts in exotic spots such as the Cook Islands.
Gifting may not be required for asset protection. Assets held jointly with a spouse as tenants by the entireties are protected in Michigan from the creditors of one spouse alone. Often times, therefore, no transfers or gifts are required to protect assets.
Conclusion. Transfer of wealth to the next generation or generations is part of normal human desire, and a foundation of estate planning and planning for wealth preservation. If you or a friend a facing any of the above situations where gifting or transfer of assets is considered, please contact Jim Modrall, Tom Pezzetti, Jr., or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe or Nicole Graf at (231) 941-9660
© 2009 BRANDT, FISHER, ALWARD & PEZZETTI, P.C.This newsletter is provided for informational purposes and should not be acted upon without professional advice.
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