Estate Planning Bits

Gift tax explained: strategies for wealthier families

With tax rates somewhat higher than in prior years based on increases in income taxes, capital gains taxes, and the new so-called Medicare tax, which is basically an investment income tax for those who earned more than $200,000 if single and $250,000 if married, the net rate of return for people may be somewhat lower. Therefore, it is often beneficial to transfer more assets to children and grandchildren, who are probably going to be in lower tax brackets.

It is relatively easy to give money away, as a person has a right to give $14,000 away to as many different people in a year as they so desire without having to file a gift tax return. Keep in mind that a husband and wife may also give a combined $28,000 per year per person. These gifts do not need to be gifted only to children, but may include grandchildren, nieces, nephews, or other relatives, or friends. Gifts to charities are not limited to this dollar amount, but the amount for income tax deductibility will depend on one’s income and itemized deductions.

In addition to the annual exclusion gifts of $14,000, there is also the lifetime exemption of $5,340,000 (in 2014) that a person may give away without paying any tax. This means that a married couple may give $10,680,000 over their lifetime, in addition to the $14,000 annual gifts, before any gift tax will be paid. Also, it should be noted that in most states, there is no gift tax limitation so that should not be an issue.

However, before making gifts, attention should be paid to the tax basis, or what is known as the cost basis of the asset. Once the asset is gifted, the donee (recipient) receives the asset at the donor’s tax basis. For instance, if a person bought IBM stock at $10 a share and it is now at $70 a share, if the stock is gifted, the donee receives the basis of $10 a share, which means that when they sell it, they will pay the capital gains tax on $60.00. However, if the donor died with the stock and left it by will or trust to the donee, then the donee receives it at the date of death value so that when it is sold, there is nominal tax basis if any at all. However, the stock is also included in the estate of the donor, so that if this person had total assets greater than $5,340,000, there would be an estate tax also.

Therefore, as you may see, it is relatively easy to make gifts, but you should pay attention to whether it is beneficial from the estate, gift, and income tax standpoint for all parties before making a gift.

Keep in mind, the issue of gifts discussed in this article is for tax-related issues only, and they are not to be applied for divestment purposes for obtaining Medicaid eligibility, as this area requires a completely separate set of rules and regulations.

Hyman G. Darling, Esq.

Image credit: VideoShoots.net under Creative Commons license

Family fight over fetus ashes

In a recent New York case, a judge was faced with a difficult decision. A fetus had died, was cremated, and the parents ended up bringing actions against each other as to the division of the ashes.

The couple had been married for a brief time, and they then separated after the wife suffered a miscarriage. The child was stillborn at twenty-six weeks, and after the divorce, they raised issues of the distribution of the ashes.

The judge had to determine whether the ashes were “marital property” as the New York law defines property that is acquired during the course of the marriage. The judge felt that the ashes were clearly property, but not the separate property of only one spouse, since both husband and wife had contributed to the production of the fetus, which was produced during their marriage.

Normally, when a child is born, the issue of property ownership disappears, as the child is considered a person and not property. On the other hand, once the baby’s status was other than live, and the remains were converted to ashes, the characterization of the remains were determined to be property.

The judge determined that the remains were to be construed as belonging solely to the mother under the statutory and common law of reproductive rights, and that the father was not entitled to have the ashes as marital property. The judge said “that while it would be good to” confer a property interest in property remains to a husband, unless it was clearly to be the case, the ashes of the wife’s stillborn birth shall be presumed to be her separate property”.

It is unfortunate that this type of case had to find its way to the court and the family could not agree, and it also remains to be seen as to whether there will be a follow-up appeal or further cases to be determined on this subject. It is doubtful that this type of situation could be anticipated and that the family would ever decide in advance as to how remains should be distributed, but certainly, this type of situation is unfortunately being determined by a court and not the family itself.

Hyman G. Darling, Esq.

Image credit: kevin dooley under Cteative Commons license

Update on home and community based care programs

In January of 2014, the Centers for Medicare and Medicaid Services (CMS), the federal agency that administers a significant portion of the funds and rules regarding institutionalized and home care, issued a new publication relative to home and community based services.

The rule that was announced is basically a decision after years of review and effort from all areas of those involved, including nursing homes, health care administrators, attorneys, home care organizations, etc. Similar to the Medicaid rules, the federal government will establish the rules but allow states to administer the programs and services available within their specific jurisdictions. Naturally, there will be a transition process while each state administers its own program after it initiates its own internal rules, regulations, and administrative procedures.

As each state begins its own implementation, there will be further information provided by CMS, which will then be interpreted by each state to allow it to comply with the federal rule. Nonetheless, this is a significantly beneficial program to allow individual states to permit additional home and community based programs, as opposed to requiring people to be institutionalized. In the past, Medicaid and Medicare would pay for many programs once it was both financially and medically necessary for a person to be institutionalized. It is now going to be easier to obtain home services with various plans to be administered by the state and permit individuals to remain in their homes.

There was a Supreme Court case called Olmstead which basically provided that a person did not have to be in the most restrictive setting, but rather, could remain in a least restrictive setting and obtain care, and this decision also supported the Americans with Disabilities Act. Community services under the new program will continue to allow many individuals to remain home, which will be beneficial for the individual, the families, and also hopefully the government, as this will also provide for less expense to care for elders in the community, as opposed to requiring institutionalized care.

This rule will take some time to be fully effective, but there will be further information provided in all states shortly, so anyone concerned with this new program should pay particular attention to the federal and state regulations as they are promulgated.

Hyman G. Darling, Esq.

Photo credit: liber under Creative Commons license

Important numbers for 2014

Every year, certain important information on changes of tax and other important numbers are revised. The following is a listing of some of the most important numbers for 2014. Some have changed, and some have remained the same.

• Social Security Tax Wage Base- $117,000
• Individual Retirement Account- Traditional Contribution- $5,500
• ROTH, IRA- Individual Contribution- $5,500
• 401k, and other types of Retirement Plans limit - $17,500
• Additional catch-up contribution if 50 or older-$5,500
• Business mileage- .56 cents/mile
• Charitable Mileage- .14 cents/mile
• Standard deduction on income taxes for married filing jointly-$12,400
• Standard deduction for single person (or married filing separately)- $6,200
• Personal exemption- $3,950
• Phase out of personal exemption (married filing jointly)- begins at $305,050
• Phase out of personal exemption (unmarried individuals)-$254,200
• Estate tax limit (federal)-$5.34 million
• Gift exclusion(annual) - $14,000
• Gift exclusion (lifetime) - $5.34 million
• Rate of tax above exclusion for estate and gift purposes- 40%
• Maximum amount for community spouse if other spouse is institutionalized- $117,240
• Maximum amount the institutionalized spouse is permitted to have (could change by state) - $2,000
• Home equity limit for long-term care purposes: Minimum - $543,000, Maximum - $814,000

Hyman G. Darling, Esq.