Family Gifts Can be Taxing – Stewart Welch

A friend once called me with concern over a gift his parents made to his sister. His parents had given her $150,000 worth of stock to purchase a home. She then sold the stock and bought the home. The parents didn’t see anything wrong with this. After all, it is their money and they should be able to do with it what they please, Right? What they did not understand was that they created two potential tax issues. First, when the daughter sold the stock, she created a ‘realized’ gain and owes substantial capital gains taxes. Second, the gift created potential gift taxes that would be owed by the parents. To avoid this the parents must file a gift tax return and use a portion of their Lifetime Exemption Amount. The point is that care needs to be taken when making gifts to family members. It is possible to make ‘gifts’ even when you did not intend to do so. Let’s look at some typical examples:

· You add your child’s name to your savings or checking account. This is considered a gift the moment your child makes a withdrawal. If the withdrawal exceeds the allowed Annual Gift Tax Exclusion ($13,000 for 2010) it will be considered a taxable gift.
· You want to be certain that a particular person receives a specific piece of real estate at your death. Your solution is to add their name to the deed. When the deed is executed, you have just made a gift for gift tax purposes.
· You decide to buy a security such as a stock, bond or limited partnership interest and do so in both your name and someone else’s name. As soon as you designate the joint owner, a gift is deemed to have occurred.

Under each of the preceding examples where you created a joint ownership arrangement, at your death the entire value of the property is included in your estate. This is because you provided all of the financial consideration.

· If you guarantee a loan for someone else, you could end up being deemed to have made a gift for gift tax purposes. Assume that your child wants to start a business with start up costs of $95,000. Your child has no money or collateral with which to obtain a loan from the bank. You agree to guarantee the loan at the bank. By doing so, you have created a potential gift. The Internal Revenue Service has indicated that no gift is imputed unless there is an actual default on the loan that requires you to satisfy the debt for the benefit of your child. If this occurs, you are deemed to have made a gift for the full-unpaid balance of the loan less any repayments to you by your child.

Providing loan guarantees can also create negative estate tax results. If you’re involved in this type of situation, proceed with caution and get competent legal advice.

Portions of this article were excerpted (or modified) from Mr. Welch’s book, J.K. Lasser’s New Rules for Estate and Tax Planning.

Preparing for the Unexpected

Estate Planning: Preparing for the Unexpected

All of us know of someone who has become incapacitated and unable to tend to their financial affairs. However, most people don’t realize that without proper advance planning, this situation can quickly turn into a nightmare. For example, assume that you are married and your husband is left mentally incapacitated as a result of a stroke. You own your home jointly and he owns $250,000 in stocks in his name. You need access to cash for special medical treatments so you plan to sell his stocks, right? Wrong! You do not have the legal right to sell his stocks and since he cannot give you permission, your only alternative is a potentially lengthy and expensive legal process to gain access to his assets…if the court grants you access.

The best defense is to prepare now for the possibility that you may become incapacitated in the future. There are four legal documents that you should consider.

1. Durable power of attorney. With this document, you appoint another person to be your ‘attorney-in-fact’, giving that person the responsibility of making financial decisions on your behalf. You may choose language that provides very broad or narrow powers. For instance, the document can be drafted to allow your attorney-in-fact to act on your behalf only if you are incapacitated (springing power) or it can allow your attorney-in-fact to act on your behalf at any time (general power). Your attorney or financial advisor can advise you which document will be best for you.
2. Revocable living trust. With this strategy, you set up a trust that is revocable (you can terminate it anytime) and transfer title to your assets to the trust. Typically you will be your own trustee, but will also name a successor trustee should you become incapacitated or die. This allows you, not the courts, to control who will continue to manage your financial affairs should you be unable to do so. The revocable living trust also protects your privacy whereas court proceedings may not. However, because of the cost and complexity of this trust, I only recommend it in special situations. For example, I had a client whose relatives threatened to have her declared incompetent and themselves declared trustee for her money as well as her legal guardian. As a safeguard, we used the revocable living trust to make certain that, regardless of the outcome, my client could decide who took control.
3. Healthcare proxy. Similar to the durable power of attorney, the healthcare proxy allows you to appoint the person who will be responsible for making healthcare decisions for you should you be unable to do so.
4. Advanced healthcare directive. With this document, you indicate the level of life-prolonging procedures, pain treatment, etc. that you wish should you be terminally ill and unable to communicate your desires. In Alabama, our legislature has drafted a document that combines the healthcare proxy and advanced healthcare directive. You can receive a copy by visiting the Resource Center at; click on ‘Links’; then click on “Living Will- State by State” .

As you read this column, I urge you to look beyond your own situation and send a copy of this column to friends and family members who may benefit from this advice.