Peacock Tales
Volume 18, Number 4 · October 2008Estate Planning: Giving It All Away
Consider the consequences to the giver and the recipient when making a gift
by Susan M. Key
Our estate attorneys are often asked, "Can't I just give it all away?" Of course you can, but be aware of the consequences. Here is a brief summary of the issues to be considered both by the giver and recipient(s) of the gift.
GIFT TAX: Any one person may give to any other one person up to $12,000 worth of property in any year ($13,000 as of January 1, 2009) without any strings attached. If the gift exceeds $12,000, the donor is required to file a Gift Tax Return, even though no tax may be due. During one's lifetime, a person has a total, aggregate exclusion of $1,000,000. Gift tax is due on amounts in excess of that amount.
PENNSYLVANIA INHERITANCE TAXES: If one makes a gift within one year of his death, the entire value of the gift (less an exclusion of $3,000.00 per recipient) is subject to Pennsylvania inheritance tax. Even if a giver survived for more than one year after the gift, to the extent he or she retained any partial ownership of the property, Pennsylvania inheritance tax is owed on that portion retained.
INCOME TAX CONSEQUENCES: The income tax basis to a recipient of a gift is the carryover basis of the donor. If the asset is later sold for more, there may be a taxable gain. In contrast, if one receives property by way of inheritance upon death of the giver, the recipient is entitled to the date of death basis or what is known as a "stepped-up" basis which is usually higher.
MEDICAID RESTRICTIONS: Medicaid is the government program which pays for skilled nursing care of someone who does not have sufficient assets to pay on their own. In 2006, Congress passed laws that restricted eligibility for Medicaid. In particular, a person is ineligible for Medicaid who has made a gift within 5 years before their application. The Medicaid law does provide that a person can become eligible for Medicaid and still own their residence. However, upon their death, the government has a lien and claim against the residence to secure repayment of any such government benefits received.
THE ASSET THAT IS GIFTED BECOMES LIABLE FOR CLAIMS AGAINST THE ONE(S) RECEIVING THE GIFT: Once given, an asset will be available to and liable for any claims against the recipient of the gift. If the recipient of a gift were to become involved in litigation, divorce or bankruptcy proceedings, the asset could be subject to those proceedings and could be lost.
A TRANSFER TO A LIVING TRUST WILL NOT SAVE ANY TAX: Giving property to a Trust outside of your will does NOT mean you pay no income tax on the income from that asset or that it is not taxable for inheritance tax purposes. To keep it out of your taxable estate, with a Trust or not, you must give up both control and the right to receive personal benefit. Any Trust that can be revoked, or revised in a significant way, will be included in your taxable estate.
Before making a lifetime gift of substantial value think twice and contact one of the attorneys in our estate planning department to help you address the art of giving.