Making a Gift on your Deathbed?

A new case out of Tax Court centers on the question of when a “deathbed gift” is complete for federal estate and gift tax purposes.  Clients make gifts to reduce the federal estate tax, or reduce it to a manageable size, especially as we draw closer to 2026 when the estate tax exemption will be a far lower number.

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

Annual gift tax exclusion. A taxpayer may give gifts to recipients under the annual gift tax exclusion without incurring any federal 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 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.  This is enhanced when you make gifts of different assets that can be discounted in value.

Now, every time I write an article about gifting, I always temper it.  You’ll noticed from the next paragraph that the estate tax doesn’t apply to too many people, and so may not be advantageous.  It is also true that assets not in your estate at your death do not receive a step up in basis.  This applies to things like stock, real estate and many other non-cash items, which means gifting may ultimately increase the total tax to beneficiaries instead of reducing it.  So, it is worth discussing this with a professional before starting a gifting campaign.  See our website for a much broader approach to estate tax planning.  https://galligan-law.com/practice-areas/estate-tax-planning/  

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.

In the new case, Estate of DeMuth v. Comm’r, TC Memo 2022-72, 7/12/22, the agent under a power of attorney for a Pennsylvania resident made gifts of the annual gift tax exclusion on an annual basis from 2007 to 2014 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.

As a fun aside for our Pennsylvania friends, Pennsylvania also has inheritance tax, which attaches to transfers made within a year of death with a $3,000 exemption per recipient.  So, the estate would still have to pay inheritance tax on the completed transfers, although the inheritance tax rates are nothing compared to the federal estate tax rates.

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.  In all cases, it is better to have, and execute, a plan of action before trying to resolve taxes on your deathbed.

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

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Update on Estate and Gift Taxes for 2022

There was a lot of discussion last year about potential changes to the federal estate and gift tax laws.  It’s possible that some of these proposals may be enacted in 2022, but for now, none of them have passed.  In the meantime, exemptions have increased for inflation, giving taxpayers a chance to lock in rates and exemptions before the federal estate tax sunsets to $5 million and some “change” for inflation. You can see a fuller explanation in the recent article, “2022 Transfer Tax Update,” from Forbes.

For now, the increased estate and gift tax exemptions are:

  • In 2022, $12,060,000 federal estate tax exemption, with a 40% top federal estate tax rate.
  • $12,060,000 GST tax exemption and a 40% top federal GST tax rate.
  • The lifetime gift tax exemption is now $12,060,000; with a 40% top federal gift tax rate.
  • The annual gift tax exclusion for 2022 increases to $16,000.

The IRS and the Treasury Department have both stated they will not attempt any claw-backs from gifts given between 2018—2025 for a taxpayer who dies in 2026 or beyond, when the exemptions return to the $5 million mark under the 2012 Act.

The opportunity to take advantage of these exemptions is now. A variety of estate planning techniques are still available to address estate and gift tax. Shifting income-producing assets to individuals in lower income tax brackets or who live in states with no or lower income taxes may be appropriate.  It might make sense to make substantial gifts in 2022, but that will be a case by case analysis.  You can see this past article discussing that more, although it should be tempered by the current tax picture: https://galligan-law.com/gifting-and-estate-taxes/  

Does this mean your estate plan needs to be revised? If you’re like most people, your estate plan is relatively flexible. However, if you haven’t reviewed or revised your estate plan in two or three years, it’s time to make an appointment with your estate planning attorney. There have been many changes in the law in recent years, and chances are, changes in your life since the last time your plan was reviewed.

The GST tax is not portable on the death of a spouse. Certain states (including New York, Connecticut, and Massachusetts) don’t permit estate tax exemption portability. A bypass trust may be the solution.

The gift tax annual exclusion amount has increased to $16,000 for individuals ($32,000 by married couples). It may be better to gift securities of interests in privately held companies or other family entities. Assets gifted now may be worth less than they were previously, and if they increase in the future, you’ve created a built-in discount.

Talk with your estate planning attorney to make the most out of these tax situations before they go away.

Reference: Forbes (Jan. 4, 2022) “2022 Transfer Tax Update”

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Why Won’t My Power of Attorney Work?

Powers of attorney are critical estate planning tools, but there are some instances they don’t work, such as with SSA and the IRS.

Powers of Attorney (POAs) are excellent and often overlooked estate planning documents.  They name an agent to act on your behalf if you cannot do so yourself, such as due to incapacity.  However, there are some instances where traditional POAs won’t work.  The IRS and the Social Security Administration (SSA) are two examples of entities that don’t recognize traditional POAs. Forbes’s recent article entitled “Two Times When Your Power of Attorney Isn’t Going to Work” explains why.

The IRS says that you must use Form 2848, “Power of Attorney and Declaration of Representative” to allow anyone to act on your behalf. This form requires you to state the tax matters and years for which the agent is authorized to act. That’s different from a traditional POA for financial matters, which usually has blanket statements allowing the agent to take any or a broad range of actions on your behalf in certain matters.  For this reason, we often include language in our POAs to create a Form 2848 specifically to deal with the IRS.

A married couple that files joint tax returns must also have each spouse separately complete and sign a form. There is no joint form.

Technically, the IRS might accept other POAs as the instructions to Form 2848 indicate this. However, the POA must meet the requirements of Form 2848 to be accepted as a substitute. That can be a tall order.

The Social Security Administration is similar. It says on its web site that it doesn’t recognize POAs. When you need someone to manage your Social Security benefits, you contact the SSA and make an advance designation of a representative payee.

A 2018 law created this feature that lets you name one or more individuals to manage your Social Security benefits. The Social Security Administration must usually work with the named individual or individuals. You can rank up to three people as advance designees. Therefore, if the first one isn’t available or is unable to perform the role, the SSA will move to the next person on your list.

Someone who already is receiving Social Security benefits can designate an advance designee at any point, and a person claiming benefits for the first time can name the designee during the claiming process. The designation can be made using your “my Social Security” account on the Social Security web site or by contacting the Social Security Administration by phone (800-772-1213) or at the local field office. A designee can also be named through the mail by using Form SSA-4547 – Advance Designation of Representative Payee.

Representative payees generally must be individuals, but it also can be a social service agency, nursing home, or one of a number of other organizations recognized by the SSA to serve as payees. If you don’t name any representatives, the SSA will name a representative payee for you, if it decides you need help managing your money. A relative or friend can apply to be representative payees, or the SSA can make the selection.

These are two very common scenarios where a POA may not work, though there are others.  Aside from the obvious cases of badly prepared or defective POAs, the Veterans Administration has their own representative system as well. But, careful planning and the advice of competent counsel can help tremendously by preparing a POA that can address as many scenarios and contingencies as possible.  Counsel can also help you identify tools outside of the POA that can assist with financial management such as trusts.  Also, before addressing your POA it might be helpful to get an idea as to the types of POAs and issues to consider with them, which you can find here.  https://galligan-law.com/what-is-the-right-kind-of-financial-power-of-attorney-for-you/

If you encounter problems using your power of attorney, consult with a lawyer who can help you navigate the system you are coping with and can advise you on how to take action for your loved one.

Reference: Forbes (Jan. 28, 2021) “Two Times When Your Power Of Attorney Isn’t Going To Work”

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