Elderly or Ill Making Gifts

Elderly or Ill Making Gifts

By: Martin M. Shenkman, CPA, MBA, JD


It can be advantageous for an elderly or very ill relative to make gifts, but the answer depends on a number of considerations:

√ Tax Savings. If your parent may face estate tax, making gifts within the annual exclusion amounts ($13,000 per person, per year in 2009) may be a great way to reduce the estate tax. Under old federal tax laws gifts within three (3) years of death were generally brought back into your estate, but this is no longer the case. Caution: Some states that have an estate tax may have different rules.

√ Avoid Filing Estate Tax Return. If your parent is close the threshold level to file an estate tax return making gifts to reduce his or her estate below the filing threshold can save the cost and complexity of filing returns (this can be $5,000-$10,000+). Example: Mom's estate is $3.7 million. If her estate is reduced by a bit more than $200,000 her estate won't have to file an estate tax return. She can make $13,000 gifts to children and grandchildren to achieve this goal.

√ Tax "Basis" and Capital Gains. Remember it is not only about estate taxes, and most American's won't owe any federal estate tax. Consider income tax. If you die owning a stock, the "investment" (tax basis) in that stock is increased on your death to the fair market value of the stock at death. Example: Your mom bought ABC stock for $10/share decades ago. It is now worth $200/share. If mom sells it today there will be a substantial capital gains tax due. If she gifts that stock to her children now, they will have the same low tax basis she has, $10/share. If instead your Mom continues to own the stock on the date of her death the children will inherit the stock with a tax basis equal to the value at the date of her death. Example: The stock basis or "investment" for the children/heirs will be $200/share and the $190/share capital gain will disappear. This is a tremendous income tax savings. Since perhaps 99% of American's won't pay a federal estate tax, this income tax benefit can be the most important end of life tax planning consideration. If your state has a state estate tax, the threshold for that tax and the marginal rate for that tax will determine the impact of this type of planning.

√ Avoid Probate. If your mom owns property in a state other than the state where she resides, it might be advantageous to gift away that property to avoid another probate proceeding in that state (called "ancillary probate"). Example: Mom lives in New Jersey and owns a small vacation condominium in Florida worth about $40,000 that has not appreciated much in value. She could make gifts using the annual ($13,000 maximum in 2009) gifts to her four children and gift away the condominium and avoid the need for a probate proceeding in Florida.

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