Gifting in the New Year

Posted on January 8, 2019

Article written by Kevin O’Donnell, Esq.

Everyone likes receiving gifts but most do not associate gifting with estate planning.  Many of our clients use gifting as a part of their estate plan for several reasons.  By giving while you are alive, you have the luxury of seeing the recipient enjoy the gift.  Furthermore, giving while you are alive permits you to place restrictions on the gift to ensure it is used in the manner you desire.  But gifting can have several consequences that must be considered to ensure it is aligned with your estate planning goals.

            First, gifting can have tax consequences because the United States has a Federal Gift Tax.  The gift tax is a “transfer tax” which means it is levied upon the transfer of assets from the donor (the one who makes the gift) to the donee (the recipient of the gift). 

            Fortunately, most of us will never pay gift taxes because:

  • The “Gift Tax Annual Exclusion Amount” (or GTAE for short) allows you to give away up to fifteen thousand dollars ($15,000) per donee per year without reporting the gift to the IRS.  This means if you have four children, you can currently give away up to sixty thousand dollars ($60,000) per year without the IRS even knowing about it.  If you are married, each spouse has his or her own GTAE meaning couples can give up to one hundred and twenty thousand dollars ($120,000) each year; 
  • If you exceed the GTAE in a given year, you are required to report the amount in excess of the GTAE to the IRS on your tax return; but
  • You will not have to pay a gift tax unless and until you have given away more than the Unified Credit Amount (currently about eleven million dollars ($11.2M) after the enactment of the Tax Cuts and Jobs Act of 2017) during your lifetime.

            Clearly most of us (myself included) do not have to currently worry about the gift tax.  But, it is important to report any sizable taxable gifts (those in excess of the GTAE) on your tax return because of their effect on your Unified Credit Amount[1].  Each time you make a gift in excess of the GTAE during your lifetime, your Unified Credit Amount is decreased by that amount.  If, for example, you made a gift of one hundred thousand dollars ($100,000) in 2018, you would report a taxable gift of eighty-five thousand dollars ($85,000) on your tax return and your Unified Credit Amount would be reduced by eighty-five thousand dollars ($85,000).  If the Unified Credit Amount remains historically high it will likely have little effect on your estate planning but if they are lowered in the future it may require more complex estate planning to ensure you are not subject to the estate tax.

            Second, you should consider the consequences gifting may have on the capital gains tax.  The capital gains tax is levied on the difference between the purchase price of a capital asset and the sale price of a capital asset.  If, for example, you purchased rental property for ten thousand dollars ($10,000) in 1965 and sold it in 2018 for one hundred thousand dollars ($100,000) you would have a taxable capital gain of ninety thousand dollars ($90,000) and would owe the IRS capital gains tax of approximately twenty percent or eighteen thousand dollars ($18,000).

            If, however:

  • Instead of selling it, you gave the rental property to your son while you are alive he would receive your tax basis in the property (the price for which you purchased the property in 1965).  As a result, he would have a tax basis of ten thousand dollars ($10,000) and he would have to pay the same eighteen thousand dollars ($18,000) in capital gains tax if he sold it for one hundred thousand dollars ($100,000); but
  • If, instead of giving it away while alive, you left the rental property to your son at your death through your will or trust he would receive a “step-up in basis.”  This means he would receive a tax basis equal to the fair market value of the rental property upon the date of your death rather than the price for which you purchased the property in 1965.  Assuming the property was valued at one hundred thousand dollars ($100,000) on the date of your death, he would pay no capital gains tax if he sold it for one hundred thousand dollars ($100,000).

            As you can see, all things being equal, it is often better to hold onto property until you pass away rather than giving it away while you are alive.  If you give capital assets (real estate, stocks, etc.) away while you are alive the recipient of the gift will likely have to pay capital gains tax if they choose to sell the asset.  If you hold onto the capital asset and it passes to the recipient at your death typically they will be able to avoid paying most, if not all, of the capital gains tax on the sale of the asset.

            Finally, gifting can cause problems for anyone applying for Medicaid to pay for long term care costs.  Medicaid is a federal program which can be used to pay for the costs of a nursing home but only if the applicant has less than two thousand dollars ($2,000) in assets.  Medicaid also has a “look-back rule” which penalizes applicants if they have given away assets within five years of the date of their application.  The purpose of the rule is to penalize those who attempt to qualify for Medicaid by giving their assets to family members in an attempt to look impoverished, but the rule can easily ensnare an innocent applicant who was regularly making contributions to a grandchild’s college fund or making donations to charity.  Thus it is always important to review your gifting strategies as you get older. 

            Gifting can be a great part of your estate plan but should be done with caution.  If you have any further questions about how gifting fits into your estate plan please contact us today to set up a consultation. 


[1] The Unified Credit Amount is the amount of assets you are permitted to give away during your lifetime and at your death without being subject to the Gift and/or Estate Tax.  The current Unified Credit Amount is about eleven million dollars ($11.2M) but that amount is subject to the whim of Congress and has historically been closer to one millions dollars ($1M). 

Posted in Estate Planning

Paying for Long-Term Care for Veterans

Posted on December 18, 2018

Article written by Kevin O’Donnell, Esq.

           Assisted living facilities and nursing homes have become astonishingly expensive.  If you are a veteran and struggling to plan for how to pay for long-term care costs without spending all of your hard earned money, you may qualify for a relatively unknown benefit called Aid and Attendance.  Aid and Attendance provides supplemental income and/or assistance with the cost of nursing homes and assisted living facilities if you meet strict eligibility rules.  

            Unfortunately, the eligibility rules for Aid and Attendance are complicated.  The good news is we are here to assist.  If you believe Aid and Attendance might be right for you or your loved one, we suggest meeting with one of our Elder Law attorneys to discuss whether you are eligible for Aid and Attendance, whether Aid and Attendance is right for you, and how to plan so that you can be eligible in the future without spending down all of your assets.

            What is Aid and Attendance?

            Aid and Attendance is a program through the Department of Veterans Affairs which provides eligible veterans with supplemental income and/or assistance with long-term care.  To be eligible for aid and attendance:

            (1)        you must not have been dishonorably discharged, must have served at least 90 days active duty with at least one day served during a declared state of war, and must be either disabled or over the age of 65;

            (2)        you must have a medical condition that requires “the regular attendance of another person” to assist in activities of daily living (“ADLs”); and

            (3)        you must be financially eligible based on the VA’s asset and income rules.

            Am I financially eligible?

            If you want to determine whether you are financially eligible, it is imperative you meet with one of our Elder Law attorneys because the VA’s asset and income rules are quite complicated and have recently changed.  A full discussion of the changes is beyond the scope of this newsletter, but the new rules changed eligibility for Aid and Attendance in three significant ways.

            (1)        In order to be eligible, a veteran’s “net worth” (which includes annual income) must now be less than $123,600.  Previously, the VA considered a Veteran’s net worth on a case-by- case basis, weighing the veteran’s (or the surviving spouse’s) life expectancy against the rate his or her assets were being exhausted by long-term care and other deductible expenses.

            (2)        The VA now imposes a three-year look-back period (similar to Medicaid’s five-year look-back period) to prevent a veteran from qualifying from Aid and Attendance by reducing net worth by giving away assets. Previously, there was no formal look-back period.

            (3)        The VA now only excludes two acres of a veteran’s personal residence from the calculation of “net worth.”  If a veteran’s residential lot area exceeds two acres, the value of additional land is included in calculation of the veteran’s net worth.  Previously, the entire value of a veteran’s personal residence was excluded regardless of its size.

            If you are a veteran and want to know more about how Aid and Attendance can assist with the costs of long-term care, contact us today to schedule a conversation with one of our Elder Law attorneys.  While every situation is different, our Elder Law attorneys can determine (1) whether Aid and Attendance is the best program for you;  (2) whether you are eligible for Aid and Attendance; and (3) how to best plan so that do not have to spend down your assets to become eligible for Aid and Attendance in the future.

Posted in Estate Planning

Democrats Win the House

Posted on December 11, 2018

Effect of the Midterm Elections on Your Estate Plan

Article provided by WealthCounsel;

Content edited and modified by Stephen M. Watson, Esq.

Estate planning is meant to be an ongoing process, not a one-time transaction. In the same way that you never stop budgeting, saving, and investing as you go through life, it is also sensible to see estate planning as a lifelong project. Let’s look at some of the considerations you should make now that the 2018 midterm elections are in the history books.

Planning in a Fluctuating Political Climate

Estate plans must change when you experience any major life change, such as marrying someone new or welcoming a child to the family.

But you also need to respond effectively to large-scale changes that are external to your personal life, such as legislation that impacts the way your assets are taxed. Regardless of your political leanings, it’s safe to say the United States is continuing to experience a period of dramatic political and legal change.

Elections like the 2018 midterms — and the resulting political change — often create fear and anxiety about how the impact of new laws and tax policy will affect your life. But you can offset that uncertainty by focusing on making the smartest estate planning decisions possible in light of the results. We’re watching the situation as it moves forward both from a federal and state law perspective, and will keep you informed of legal and tax changes that affect you and your loved ones.

The Midterm Split: Democrats Won the House, Republicans Kept the Senate

Before the midterm elections, it was unclear how legislation like the 2017 Tax Cuts and Jobs Act would be affected. Now that we know the House and Senate are split between Democratic and Republican control, it remains to be seen how well the parties will work together on a common agenda.

So what does a divided federal government mean for you? The budget reconciliation strategy the Republicans used to pass the Tax Act will no longer be as viable an option, which could slow additional legislation the Republican-controlled Senate proposes. According to Kiplinger, “What is likely off the table with a Democratic House and Republican Senate is tax reform 2.0, which would make certain provisions of the 2017 tax law permanent, locking in individual and small business tax cuts. Social Security and Medicare reforms, which might have helped offset the effect of the tax cuts, are also likely off the table.”

When the new Congress first convenes in January, we will continue to monitor proposed legislation so you are informed about potential risks and opportunities for your estate plan.

Some Things Are Constant, No Matter Who’s in Charge

Amid so much political uncertainty, it’s important to remember there are many foundational constants in estate planning that are important no matter who’s in charge politically or what the tax laws look like. As part of your financial wellness team, we’re staying informed and will be here to guide you in matters of estate planning.

In order for you to grow and retain your wealth, careful estate planning is always a necessity — regardless of which party controls Congress. Many things may change, but a lot will remain the same: no one can legislate away irresponsible spending, divorce, lawsuits,bankruptcy, sibling rivalry, and the many non-tax reasons to utilize estate planning. An up-to-date comprehensive estate plan remains the best option for passing along your wealth and your values to the next generation.

Will your estate plan do what want it to do?Is it customized to help you thrive in the current U.S. legislative landscape?  Are there any changes in Virginia law that may affect your plan? Let’s take a look. Give us a call today.

Posted in Estate Planning

What Happened to My Property?

Posted on November 28, 2018

Article written by Stephen M. Watson, Esq.

For clients who are married, most often they want their assets to go something like this:

First, to the surviving spouse;

Second, to the children, and further descendants (grandchildren, great-grandchildren, and so on).

After that, some want their estate to go to brothers and sisters; some want it to go straight to nieces and nephews; and some want it to go to their church or other charity of choice.

Another way of looking at this is that most clients want their property to go to the surviving spouse, but after that they want their assets to stay in the bloodline (children and other descendants, and then to other extended family members).

So, what happens to those who don’t have a plan?

Many clients that think that if they die without a Will, that if no marching orders are left behind, everything will go to the state.

Well, no.  Instead, when a Virginia resident dies leaving property behind that has nowhere to go—no Will, no beneficiary designation, no joint ownership—then we must rely on Virginia law to dictate where the property goes.

This body of Virginia law is known as the Law of Intestacy.

Think of it this way: If you die with a Will, then you are said to have died Testate.  But if you have no Will, and no other plan for the asset (beneficiary designation, for instance), then you are said to have died Intestate, and that property must go through a court process called probate.  The probate process will turn to the Law of Intestacy to determine where the property goes.

The Law of Intestacy contains a list, or a hierarchy, of who gets our property when we have left no instructions.

Right now, in 2018, when someone dies in Virginia without a Will or other directive, the list looks like this:

First: All to the Surviving Spouse, but only if all surviving children of the deceased are also the children of that spouse.  If the deceased left behind any surviving children (or grandchildren, great-grandchildren, etc.) who are not the children of the surviving spouse, then the surviving spouse gets only one-third, and the remaining two-thirds go to the deceased’s children.

Second: If there is no Surviving Spouse, then all goes to the deceased’s surviving children and their descendants.

Third: If no children or descendants, then all goes to the deceased’s parents, or surviving parent.

Fourth: If neither parent is living, then all goes to the deceased’s brothers and sisters, and their descendants (the deceased’s nieces and nephews).

The Code then stretches out even further in search of a “next of kin,” and if there simply are no takers, then it goes to the state.

An interesting point about our current Law of Intestacy is that the spouse is number one on the list.  It was not always this way.  In fact, given how long Virginia law has been in existence, the spouse has been in the number one position for only a short time.  When did the spouse take this number one position?  July 1, 1982.

Before July 1, 1982, it was generally the children who took the number one spot.  In fact, prior to 1956 the spouse was at the number four level, and in that year jumped to number two.

As discussed above, having the spouse in the number one position probably reflects what most clients would want for their own property.  But for property that has been inherited from Mom and Dad, the Law of Intestacy can have unintended consequences.

Consider married clients who draft Wills leaving everything to each other, and then all to their daughter, their only child.  Under this plan, all will end up going to the one child.  That daughter becomes the owner of the property.  It’s hers.

The daughter is married and has one son (the grandson of the clients), and that grandson is the son of the daughter and her husband (the clients’ son-in-law).

What happens to all the daughter’s property (including the property left to her by Mom and Dad) when she dies?  Who is first on the list if she dies intestate?

Her husband.

But wait a minute, cry the clients.  We want our property to go to our grandson!

Too late.  When the clients left their property to their daughter by Will, beneficiary designation, or joint ownership (think joint bank accounts), then it became her property.  It’s hers.  She owns it.  And under the Virginia Law of Intestacy, all her property (which now includes anything left to her by Mom and Dad) goes to the daughter’s husband.

But what if he remarries?

Who’s first on the list?

You mean…?

Yes, that property left to the daughter went to her husband when she died.  And while he was alive he stuck it all in a joint bank account with his new wife.  And when he died, everything went to the new wife.  She can do whatever she wants with it.  It’s up to her if she wants to leave anything to your clients’ grandson (her stepson).

Our current Law of Intestacy does not have the emphasis on the bloodline that it used to, and with the spouse being in the number one position, there is no guarantee that your property will stay in your bloodline.

How do I keep my property in my bloodline?

That, my friend, is why I do a lot of trusts.

Posted in Estate Planning

Protecting Your Beneficiaries from Remarriage, Failed Marriages, Creditors, and Themselves

Posted on November 6, 2018

Article written by Trey T. Parker, Esq

Estate planning is more than transferring wealth – it is about people.  Depending on your situation, this may include any or all of the following:  spouses, children, grandchildren, extended family members, and friends.  A well-drafted estate plan will address the circumstances of each of these potential beneficiaries, your goals and values, and coordinate them in a way that leaves a lasting legacy of which you can be proud.  For many, the revocable living trust is well-suited for this purpose because it can be tailored to provide for the people you love while also protecting them from remarriage, failed marriages, creditors, and themselves.  In other words, it will leave your wealth to whom you want, when you want, and how you want.

For married couples, the primary concern in estate planning is typically to ensure that the surviving spouse will have access to all of the wealth for his or her needs.  A secondary concern is to ensure that the other beneficiaries, such as children, will remain beneficiaries if the surviving spouse remarries.  Through the use of a revocable living trust with special marital sub-trust provisions you can achieve both.  The special marital sub-trust provisions, often referred to as a QTIP Trust, allows the surviving spouse to have access to all of the wealth for his or her lifetime needs, but the surviving spouse is unable to redirect the wealth to his or her own children, a new spouse, etc.  This type of estate planning may be useful for any married couple, but is especially relevant for young couples and blended families.

A revocable living trust can also contain provisions that protect children and other beneficiaries from failed marriages, creditors, and themselves.  If you establish sub-trusts for each of your beneficiaries, you can provide them with something akin to safety-deposit boxes in which only they or a trustee selected by you has the key.  The beneficiary of the sub-trust is not vested with legal ownership, and therefore a spouse of the beneficiary cannot claim the assets in divorce, a creditor cannot attach the assets in lawsuits or bankruptcy, and the assets are not subject to spend-down provisions for long-term care for the beneficiary.  In addition, the terms can provide incentives to a productive lifestyle by stopping distributions if the beneficiary becomes involved in destructive behavior, such as drug or alcohol abuse, gambling, or excessive spending.

While there is no “right” or “wrong” way to plan your estate, there are methods that are better suited to achieve your goals and objectives.  Therefore, it is important to work with an estate planning attorney who has experience and expertise in this delicate area so you are aware of all your options.  After discussing your unique circumstances, goals, and options, you will be able to complete an effective and efficient estate plan that is a caring and loving act for those who matter most.

Posted in Estate Planning