Beware of Gifts…

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Adel-Headshot-copy-296x300By Mitch Adel, Certified Elder Law Attorney
Cooper Adel & Associates

As another year comes to an end, and as many seniors contemplate 2013, they often think that it might be time to “do some gifting.” From a financial and estate planning perspective, this is one of the most dangerous thoughts you can have. Gifting is so seductively simple at first blush that everyone thinks that they understand it—often leading to costly and irreversible mistakes. Gifting is one of the most complex areas of law.

Below is a quiz that could save you thousands of dollars. There are no trick questions.

True/False Gifting Quiz

If you give someone over $14,000 in any one year you have to pay income tax.
Circle:     True    False

Almost everyone should do “annual gifting” to save Federal Estate Tax.
Circle:     True    False

Most people should do an “AB” trust to save on the Federal Estate Tax.
Circle:     True    False

If you want to make sure that your real estate and securities get to your children, you should start gifting all, or part, of them while you are alive.
Circle:     True    False

If someone is facing a nursing home stay, you should immediately gift the home and investments to the other spouse or the children.
Circle:     True    False

A gift to your “Revocable Living Trust” will protect the gift from a nursing home stay.
Circle:     True    False

Following 5 years, any gift is safe from a nursing home loss.
Circle:     True    False

A gift to a “Revocable Living Trust” will protect you from creditors and divorces.
Circle:     True    False

If you have a handicapped child you should make gifts to them as part of your will.
Circle:     True    False

Now, lets look at the answers to the Gifting Quiz. All of the answers are “False” or generally false. Missing even one of these questions could cost you serious money. The answers are not designed to provide legal advice or a complete explanation, but rather to give you enough information to let you research the question yourself in more detail or start a conversation with your attorney or advisor.

Answers to the True/False Gifting Quiz

False: There is never any income tax on a gift (either to the “giver or the getter”), regardless of the amount. Gifts over  $14,000 are subject to Federal Estate and Gift Tax. But this tax will only apply to you if you have over 5.25 Million as a single person or 10.5 Million for a couple (2013 Amounts).

False: Very few people benefit from “annual gifting” to save on the Federal Estate Tax unless your estate is over or close to the limits described in question 1. There are many beneficial reasons to gift, such as helping a friend or family member in need and lowering your assets because of nursing home bills or a frivolous lawsuit. Depending on your situation, direct gifts and special trusts can help accomplish these needs.

False: Since the January 2013 tax law changes, very few people should do an “AB” trust unless your estate exceeds the limits described in question 1. The purpose of an “AB” trust was to create an irrevocable trust for the first spouse to die in order to have the decedent’s assets not included in the second spouse’s estate in order to prevent “estate doubling” at the second spouse’s death.

False: This can be a dangerous step because families can lose control of their funds, capital gains tax often comes into play for the recipients and parents’ assets are subject the children’s problems such as divorces, law suits and creditors.

False: Gifting to a spouse has no effect since they combine all of the assets in order to determine nursing home eligibility. This is true even if you have only been married a short time or if this is second marriage and you keep separate assets or even have a pre-nuptial agreement.

False: This is common misconception. A living trust provides no nursing home protection for the assets in the living trust. There are many reasons to do a revocable living trust, but nursing home protection is not one of them.

Sometimes, but not always: The five-year period is an “audit window” where you must disclose assets and is different from the “penalty period” that is assessed for assets disclosed during the audit window. For example if you made an application for nursing home benefits when the parent went into the nursing home and you disclosed the gift of a 1.2 million dollar farm recently made to the children your penalty period in Ohio in 2013 would be approximately 16.3 years! In addition if you made a gift of real estate with a live estate, in Ohio, the life estate would be valued and subject to post death nursing home estate recovery, even if the gift was made 20 years ago.

False:  With respect to creditors, creating a revocable living trust and putting your assets the living trust will not protect your from creditors or law suits. In a divorce, It has been our experience that most courts will consider any assets placed in a living trust following the marriage fair game. Domestic Asset Protection Trusts or Legacy Asset Trusts can solve these issues depending on the circumstances.

False.  If you have a handicapped child you must be very careful about how you make gifts to them, particularly after your death. Post death distributions from a will or regular living trust will cut off some types of government benefits to the child. In other cases, such as where a parent is going into a nursing home, gifts to a handicapped child may actually help protect the assets.

This is an extremely complex area of the law—beyond the knowledge of many traditional financial advisors. It’s critical to consider all of your options and work with a trusted legal advisor to ensure that any gift you make will have a positive impact on your finances, as well as for those who receive it.

Mitch Adel is senior partner at Cooper, Adel and Associates, A Legal Professional Association. With offices in Sidney, Centerburg, Monroe and Wilmington, Ohio, Cooper, Adel & Associates has clients statewide and offers regular seminars to educate seniors on critical legal and financial issues. For more information, visit www.CooperAndAdel.com..

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