Can You Gift Money on Your Deathbed? – Annapolis and Towson Estate Planning

A new case out of Tax Court centers on the question of when a “deathbed gift” is considered acceptable for estate and gift tax purposes. The powerful tax law provisions used to help many taxpayers avoid federal estate tax, or reduce it to a manageable size, makes this an important decision, especially as we draw closer to a time when estate tax exemption is likely to return to a far lower number.

The two tax law provisions, described in the article “Tax Court Says When Deathbed Gifts Are Complete” from accounting WEB, are the following:

Annual gift tax exclusion. A taxpayer may give gifts to recipients under the annual gift tax exclusion without incurring any gift taxes. The exclusion, indexed for inflation in $1,000 increments, is $16,000 per recipient in 2022. It’s doubled to $32,000 for joint gifts made by a married couple. Estates can be reduced significantly with planned use of the annual gift tax exclusion. For instance, if a taxpayer and a spouse give the maximum $16,000 to five relatives for five years in a row, they will have transferred $800,000 ($32,000 x 5 x 5) out of their estate, free of taxes.

Unified estate and gift tax exemption. In addition to the annual gift exemption, gifts may be sheltered from tax by the unified estate and gift tax exemption. As of this writing, the exemption is $10 million, indexed for inflation, which brings it to $12.06 million in 2022. It is scheduled to drop to $5 million, plus inflation indexing, in 2026.

Using the exemption during the taxpayer’s lifetime reduces the available estate shelter upon death. These two provisions give even very wealthy taxpayers a great deal of flexibility regarding liquid assets.

The new case came about as a result of a resident of Pennsylvania, who executed a Power of Attorney (POA) in 2007, appointing his son as his agent. The son was authorized to give gifts in amounts not exceeding the annual gift tax exclusion. From 2007 to 2014, the son arranged annual gifts to his siblings and other family members, in accordance with the POA.

The father’s health began to fail in 2015 and he passed away on September 11. On September 6, five days before he died, the son wrote eleven checks, totaling $464,000 from the father’s investment account.

Some recipients deposited the checks before the decedent’s death, but others did not. Only one check was paid by the investment account before the decedent’s death.

The question before the Tax Court: are the gifts complete and removed from the decedent’s estate?

According to the IRS, any checks deposited before death should be excluded from the taxable estate, but the Tax Court looked to the state’s law to determine the outcome of the other checks. The Tax Court ruled the checks not deposited in time must be included in the decedent’s taxable estate.

The estate planning lesson to be learned? Timing matters. If checks are written as part of the plan to minimize taxes, they must be deposited promptly to ensure they will be considered as gifts and reduce the taxable estate.

Reference: accounting WEB (Aug. 26,2022) “Tax Court Says When Deathbed Gifts Are Complete”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Another Reason Why You Need an Estate Planning Attorney – Annapolis and Towson Estate Planning

The saying ‘you don’t know what you don’t know’ is most apt in estate planning. A well-meaning person may create a will with the goal of leaving property to grandchildren, only for the children or their parents to learn after the grandparent’s passing the law does not permit property to be transferred. A recent article titled “The Arcane Law That Could Derail Your Inheritance Plans” from yahoo! entertainment is a good example of the importance of estate planning attorneys to create effective estate plans.

The rule against perpetuities may prevent a property from remaining in the family, if it takes too long for the will’s conditions to be met.

The rule against perpetuities creates a standard for when an interest in land or property must vest. The rule against perpetuities stipulates that a will, estate plan or other legal documents intending to transfer property ownership more than twenty-one years after the death of the primary (decedent) becomes void.

This rule means a person can’t legally guarantee their grandchildren, great-grandchildren or other heirs in the future may retain ownership of the grantor’s property. This may be an obscure law. However, the problem becomes real if and when someone should challenge the will, as this is a legitimate legal argument to be made.

This is an old law dating back to 17th century England, when courts wanted heirs and descendants to be able to buy and sell land without the influence of ancestors who tried to control property over many generations. The United States adopted this law and while many legal authorities see it as being outdated, only some states have drafted modifications or new laws to change it.

In 1986, thirty-one states addressed the problem by drafting a “wait and see” approach, meaning an interest in the property must vest within ninety years of the implementation of a will or life estate. This has alleviated the limit, meaning a will or other transfer of property has nine decades to vest before it becomes void.

If your estate plan includes leaving assets for grandchildren, including real estate property, contact us to speak with one of our experienced estate planning attorneys about this admittedly arcane law. If your state is one that has not adopted the “wait and see” approach, you will be glad you prepared.

Reference: yahoo! entertainment (Aug. 20, 2022) “The Arcane Law That Could Derail Your Inheritance Plans”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

IRS Extends Portability Election Option Deadline from Two to Five Years – Annapolis and Towson Estate Planning

The Internal Revenue Service recently issued a change to the rules regarding portability of a deceased spouse’s unused exclusion (DSUE), expanding the time period from two years to five years. As explained in the recent article “IRS Extends Portability Election” from The National Law Review, portability allows spouses to combine their exemption from estate and gift tax. Here is how it works.

A surviving spouse may use the unused estate tax exemption of the deceased spouse to lower their tax liability. Let’s say Spouse A dies in 2022, when the estate tax exemption is $12.06 million. If, during Spouse A’s lifetime, they had only used $1 million of their exemption amount, Surviving Spouse B may elect portability to claim $11.06 million DSUE, as long as they file for the exemption within five years of the decedent’s date of death.

Prior to the rule change, the surviving spouse only had two years to claim the DSUE. The due date of an estate tax return is still required to be filed nine months after the decedent’s death or on the last day of the period covered by an extension, if one had been secured.

The IRS had previously extended the deadline to file for portability to two years. However, over time, the taxing agency found itself managing a large number of requests for private letter rulings from estates failing to meet the two year deadline. It was noted many of these requests for portability relief occurred on or before the fifth anniversary of a decedent’s date of death, which led to the current change.

How do I Elect Portability?

To elect portability, the executor (or personal representative) of the estate must file an estate tax return on or before the fifth anniversary of the decedent’s date of death. This estate tax return is a Form 706. The executor must note at the top of Form 706 that it is filed pursuant to Rev. Proc. 2022-32 to elect portability under Sec. 2010(C)(5)(A).

Eligibility to elect portability is not overly burdensome for most people. The decedent must have been a U.S. citizen or resident on the date of their death and the executor must not have been otherwise required to file an estate tax return. This means the decedent was under the estate tax exemption at the time of their death. With the current estate tax exemption now at $12.06 million for an individual, most people will find themselves well under the limit.

This new regulation expands the number of people who will be able to take advantage of the exemption and will help families pass wealth on to the next generation without incurring the federal estate tax.

To learn more about how you can elect portability, please contact us to schedule a call with one of our experienced estate planning attorneys.

Reference: The National Law Review (Aug. 1, 2022) “IRS Extends Portability Election”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys