Thinking Through Lifetime Gifts

by Elizabeth Q. Boehmcke, Esq.

Making gifts to one’s family, friends and to favorite charitable causes is a normal part of life. However, have you ever thought through the implications of making such gifts during your lifetime? Lifetime gifting can affect your individual income taxes, your individual estate and gift taxes, the capital gains taxes that are potentially to be paid by the recipient of the gift, and your eligibility for certain governmental programs like Medicaid. Let’s touch on these issues one by one to see how they fit into an overall wealth management strategy.

Charitable Gifts

Gifts to charity are eligible for deduction on your individual income tax return, subject to certain restrictions and limitations. If you itemize your deductions, you can deduct all of your cash contributions to many charities (the so-called “50% charities which include most churches, schools, hospitals, publicly-supported charities and some private foundations), subject only to a limit of 50% of your adjusted gross income. However, if you have appreciated property (such as stocks) to transfer to a charity, you have a choice to either the sell the property yourself and transfer the cash or give the stock itself to the charity. If you sell it yourself, you are subject to paying the capital gains taxes on the sale. However, by giving the property to the charity in-kind, you do not have to pay the capital gains tax and the charity does not pay the tax either. You deduct the fair market value of the property at the time of the donation; however, there is a limit of 30% of your adjusted gross income for contributions of capital gain property. However, in both instances if your deduction is limited, you can carry the unused deduction forward for 5 years. Please be aware that this discussion just scratches the surface of the tax planning you can do with lifetime gifts to charity, and there are additional rules and limitations in connection with donations to certain private foundations and donations of appreciated property. If you are thinking about making a significant charitable contribution, either during lifetime or at death, please contact an attorney at the Hook Law Center so that we can discuss your many options with you.

Estate and Gift Taxes and Impact of Lifetime Gifts

Your individual liability for estate and gift taxes can be affected by lifetime gifts. Under current federal law, the estate and gift taxes are a unified regime and, in 2015, you are entitled to a cumulative $5.43 million exemption from estate and gift taxes for the value of assets passing during life and at death. It is worth noting, however, that you also have an annual gift tax exemption that allows you to transfer $14,000 of assets free of any gift tax to as many different individuals as you would like. You can also make certain transfers directly to educational and medical institutions in unlimited amounts because these transfers are not deemed to be gifts by the Internal Revenue Code. Also, gifts to charity do not affect your lifetime estate and gift tax exemption.

So far, so good. But here’s the wrinkle – if you make lifetime gifts of appreciated property, the recipient will take your basis for income tax purposes. On the other hand, if you make the gift of the appreciated property at death, the recipient receives a “step-up” in basis to the fair market value of the property at your death. Thus, if you have highly appreciated assets, you should consider whether making the lifetime gift of the property makes sense. If your beneficiary is likely to sell the highly appreciated asset, he/she will incur a large capital gain and have to pay the capital gains tax. If, on the other hand, you give the highly appreciated asset away at your death, the beneficiary would not likely have a capital gains tax to pay unless the asset appreciated from time of death to time of sale. But if the asset is one for which sale is not contemplated, there may be other reasons to make a lifetime gift.

Impact of Lifetime Giving on Medicaid Planning

Planning for governmental benefits, such as Medicaid , is a complex and complicated task. However, with respect to lifetime gifting, anyone who thinks that Medicaid may be a possibility should be aware that Medicaid has a 60-month look-back period. For Medicaid, any uncompensated transfer made within 60 months of the application for Medicaid will incur a penalty period during which time the applicant will not be eligible to receive long-term care services from Medicaid. Thus, a gift that may be exempt from federal gift taxes because it is under $14,000 may well become a transfer for which Medicaid will impose a penalty. Although we have strategies that we can employ to assist in limiting the unintended consequences of transfers made within the look-back period (and in certain circumstances potentially eliminate the penalty), it is important that you be aware of the look-back period when making decisions about lifetime gifting. If making a significant lifetime gift is a possibility for you, it is far better to make that gift well in advance of needing governmental benefits. On a side note, the U.S. Department of Veteran’s Affairs does not currently have a look-back period for gifts made prior to applying for benefits; however, changes have been proposed that would include a look-back period similar to Medicaid. These proposed changes have not yet been finalized, so it is uncertain when, or if, the changes will become effective.

As you can see, making lifetime gifts may seem simple and straightforward. However, as with many things, there are consequences to the decisions we make and proper advice and planning is necessary to optimize your wealth management planning. Make an appointment today to discuss how the attorneys at the Hook Law Center can assist you in thinking through your lifetime gifting strategy.

Kit Kat

Ask Kit Kat: Mind Reading

Hook Law Center:  Kit Kat, can dogs really read our minds?

Kit Kat: Well, there is some new research about this very subject. It seems, dogs, above every other animal, have the most capacity to understand what humans are thinking. For example, dogs understand the pointing response almost from puppyhood. If a person points to 1 of 2 containers, the dog will assume the one being pointed to has something desirable in it like food. Scientists have proven they’re not operating by smell. Even if the containers are hidden from view, the pointing gesture will result in choosing the correct container which has food.

My mom’s family had a Collie while she was growing up. He was a fierce defender of their property if another male dog approached. However, when little kids would visit and pet him, you could almost see him say to himself, “I must put up with the pulling of my hair, because they don’t understand.” When the child was not close, you could see him visibly relax, as if to say, “Now, I’m safe!” He never once snapped or nipped at them. That’s anecdotal evidence, but I’m sure our readers have some of their own similar stories.

It’s interesting that wolves, though descended from the same lineage, do not behave like their canine relatives. Apparently, domestication is what made the difference. Over time, wolves that were the most comfortable with human contact evolved into the present day dog.

Further evolution led to the myriad of breeds we have today. Big or small, dogs seem to possess a level of intellectual perception that other species can’t match. Consider the fact that dogs are used as helpers and guides for those with disabilities. In early June, a golden retriever named Figo in upstate NY put himself in harm’s way (actually in front of a school bus) to shield his legally blind owner from the impact. Fortunately, both survived with only minor injuries. Now, we cats have our own wonderful qualities, but I must hand it to dogs—they are trainable and companionable in a unique way!

(http://www.salon.com/2015/05/23/our_dogs_can_read_our_minds_the_new_neuroscience_of_ animal_brains_and_understanding)

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Upcoming Seminars and Events

  • June 30, 2015 –The HLC Monthly Seminar for June is Securing Your Retirement:  Transforming Social Security Into a Winning Retirement Strategy.  The seminar is scheduled at 10 a.m. on Monday, June 30, 2015 at Crowne Plaza – Towne Center, 4453 Bonney Road, Virginia Beach, VA.  To register and reserve your seat, please call 757-399-7506 and ask for Debbie or register online at hooklawcenter.com/seminars.
  • June 25, 2015Andrew H. Hook will be speaking to a group at the Virginia Beach Psychiatric Center titled,  “Avoiding Elder Abuse By Agents, Trustees and Conservators.”
  • August 12, 2015 – Andrew Hook will be speaking to a group at Maryview Hospital in Portsmouth, Virginia.
  • August 20, 2015 – Andrew Hook will be speaking on Veterans Benefits at The Chesapeake.
  • August 21, 2015 – Andrew Hook will be speaking to a group at DePaul Hospital in Norfolk, Virginia.
  • August 27, 2015 – Andrew Hook will be speaking to a group at Mary Immaculate Hospital in Newport News, Virginia.
  • September 9, 2015 – Andrew Hook will be speaking at a Virginia Continuing Legal Education seminar.
  • October 26, 2015Shannon Laymon-Pecoraro will be speaking at the National Business Institute’s seminar on The Probate Process from Start to Finish in Virginia Beach, Virginia.

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