Death

Medicaid Planning: The Fundamentals

Below is a one page summary regarding Medicaid Planning in Wisconsin that we provide our clients with when discussing Medicaid Planning (the laws regarding Medicaid Planning may be different in your State). It should be noted that, much like tax and estate planning, an experienced professional should be consulted if you are thinking about engaging in any Medicaid Planning. It is an extremely complex set of rules and requires up-to-date knowledge (all of the below information is only current and accurate as of September 2015; after such date the information may no longer be current and accurate).

Prior to Applying for Medicaid: The Lookback Period

  • 5 years prior to the date of the Medicaid application
  • All gifts (or divestments) during that lookback period will cause a penalty
  • Penalty calculation:
    • Total amount of gifts (or divestments) divided by average cost of care
      • Average cost of care is $252.95/day
    • Example: You make a $20,000 gift to your child and apply for Medicaid 4 years later.
      • Penalty period: $20,000 divided by $252.95
      • Penalty period = 79.067 days (or just over 2½ months)
    • Therefore, you will not qualify for Medicaid assistance for at least 79 days from the date of application and will have to arrange for care or payment for care yourself.

While Receiving Medicaid: The Resource Limits

  • Resource Limits for Single Persons (or if both spouses apply for Medicaid):
    • Asset Limit: $2,000
    • Irrevocable Burial Trust: $3,000
    • Life Insurance – Face Amount: $1,500
    • Income: $45/month
  • Resource Limits for Couples (if only one spouse is applying for Medicaid and the other spouse remains in the community):
    • Assets: One-half of total countable assets
      • However, not less than $50,000 nor more than $119,220
    • Income: Minimum Monthly Needs Allowance (MMNA) is $2,655/month
  • Exempt Assets:
    • For the Medicaid Applicant –
      • A vehicle
      • Primary residence (if plan to return home or if spouse lives in home)
      • Burial space
    • For Community Spouse (non-Medicaid applicant) –
      • All of the Community Spouse’s retirement assets

After You Pass Away: Estate Recovery – Under certain circumstances, the State of Wisconsin can place liens on your assets and/or recover remaining assets from your Estate after your death.

Planning Opportunities:

  • Self-insure
  • Long-term care insurance
  • Gifting (or divestments) either outright or in trust
  • Other planning opportunities (for example, purchasing annuities, life care agreements, etc.)

I hope this helps!

-Matt

 

© 2015 Matthew D. Brehmer and Crummey Estate Plan.

The Foundation – Part 2: Probate Avoidance

Continuing with Part 2 of this three part series, I am going to briefly cover some of the most popular probate avoidance strategies. As a refresher, the purpose of this series is to cover the fundamentals and foundation of estate planning and some of what I typically go through with a client during an initial estate planning consultation, including the following topics:

Part 1 – Last Wills & Testaments and Powers of Attorney
Part 2 – Basic Probate Avoidance Strategies
Part 3 – Joint Revocable Living Trusts

For purposes of this post, it is extremely important to remember that if any of the following probate avoidance measures are used with respect to any of your assets, the distribution of those assets upon your death will NO LONGER be controlled by your Last Will & Testament. The designation or form you used to avoid probate will now control the distribution of that asset upon your death. This is one of many reasons why it is important to talk to an experienced professional when drafting your estate plan; the experienced professional can work with you to ensure that your entire estate plan (i.e., your Will, your beneficiary designations, etc.) works together to achieve your desired goals and results.

Example: The “Average” Estate

A significant portion of most individuals’ estates are made up of the following assets: a house, bank accounts, retirement/brokerage accounts, life insurance, an automobile and tangible personal property (e.g., your household furnishings, antiques, collectibles, etc.). By implementing a few of the probate avoidance strategies below, most individuals will have the peace of mind in knowing that a significant portion of their estate, if not all of it, will avoid probate.

And, even if not all of the assets avoid probate (e.g., like the car and the tangible personal property), if those remaining probate assets are below a certain threshold amount, your State may still provide a way to transfer those assets without the need for probate after your death (e.g., in Wisconsin, if you probate assets are under $50,000, they can be transferred by affidavit and probate can be avoided). This should be a goal for almost all estate plans – to at least have the value of your probate assets below the probate threshold amount in your State.

Joint Ownership

Generally, any assets held and titled as joint ownership property pass to the survivor of the joint owners outside of probate. Common assets that can be held jointly include bank accounts and real estate. However, keep in mind that the asset will pass fully to the survivor, even if you wish it to go to someone else.

Beneficiary Designations

Any assets where you can and do designate a beneficiary will pass to the beneficiary outside of probate. Common assets where beneficiary designations are used include retirement accounts (e.g., pension plans, 401(k)s, IRAs), life insurance policies and brokerage accounts. If you wish to designate a beneficiary to any of these types of accounts, you can do so by requesting a beneficiary change form from your account administrator.

Payable on Death Accounts

Similar to beneficiary designations, payable on death accounts allow you to designate a beneficiary of that particular account. If such a beneficiary is designated, that account will pass to the beneficiary outside of probate upon your death. Payable on death accounts are particularly useful when it comes to your bank accounts. Most banks (if not all) will allow you to name a beneficiary to your bank account, you just need to speak to your banker.

Transfer on Death Designations

Again, similar to beneficiary designations, transfer on death designations are used to pass interests in property upon your death to a named beneficiary without the need for probate. The most common use of transfer on death designations are for real estate and business interests. This type of probate avoidance strategy will usually involve seeing an attorney to draft the transfer on death designation.

Marital Property Agreements (with Washington Will provisions)

For married couples in some States, marital property agreements with Washington Will provisions can be used to pass all of the decedent spouse’s property to the surviving spouse upon the death of the first spouse without the need for probate. If otherwise consistent with your estate plan, this can make the time and expenses involved at the first spouse’s death much easier to cope with. However, only some States allow for this type of probate avoidance strategy. This will also require you to see an attorney to draft the agreement.

Trusts

Any assets held in trust will also pass to (or be held for) the beneficiary of the trust without the need for probate. Generally, almost any asset can be held in trust; thus, this can provide a lot of flexibility and the most overall probate avoidance. Additionally, this will also require an attorney to draft the trust agreement. In Part 3 of this series I will focus solely on trusts so be sure to check that out once I post it.

Recap: The “Average” Estate

Above I stated that a significant portion of most individuals’ estates are made up of the following assets: a house, bank accounts, retirement/brokerage accounts, life insurance, an automobile and tangible personal property. The following is a recap of the probate avoidance strategies that can be used to pass those assets to your heirs without the need for probate:

  • House – joint ownership, transfer on death designations, and trusts.
  • Bank accounts – joint ownership, payable on death accounts, and trusts.
  • Retirement/brokerage accounts – joint ownership, beneficiary designations, and trusts.
  • Life insurance – beneficiary designations and trusts.
  • Automobile and tangible personal property – joint ownership and trusts.

Conclusion

As you can see, there are multiple ways to avoid probate in regards to a particular asset and among your entire estate. The strategy and combination of strategies chosen will be different for every individual; some strategies may provide more advantages than other strategies depending on your individual circumstances. Additionally, many of the above probate avoidance strategies can be achieved for relatively little cost and time while saving your estate and your heirs A LOT of time and expense after you pass.

However, like I stated in Part 1, any plan starts with a good and solid foundation, and that includes your estate plan. That means that even if you engage in the above probate avoidance strategies, you still need to have a Last Will & Testament to “catch” those assets that you may have missed or that could have fallen outside the probate avoidance measures you took. Probate avoidance strategies must be integrated into an already existing solid estate plan; otherwise, the benefits and advantages such strategies provide will be diminished.

Make sure to check out Part 3 (Trusts) of this series when I post it. And, lastly, like with any topic I blog about, I am only scratching the surface of these topics, you must contact a professional in order to fully consider how these estate planning strategies will play out in your individual circumstances.

I hope this helps!

-Matt

 

© 2015 Matthew D. Brehmer and Crummey Estate Plan.

The Foundation – Part 1: Wills and Powers of Attorney

Many of my posts so far have focused on what some may consider “higher level” estate planning; but, what about the estate plan foundation that everyone needs? In this three part series, I am going to briefly cover the fundamentals and foundation of estate planning and some of what I typically go through with a client during an initial estate planning meeting:

Part 1 – Last Wills & Testaments and Powers of Attorney
Part 2 – Basic Probate Avoidance Strategies
Part 3 – Joint Revocable Living Trusts

There are three fundamental and “foundational” estate planning documents that every single person age 18 and older should have: 1) a Durable Power of Attorney; 2) a Healthcare Power of Attorney; and 3) a Last Will & Testament. The two Powers of Attorney govern your affairs prior to your death, while the Last Will & Testament governs your affairs after your death.

Before Death

Generally speaking, as soon as a person turns 18 years old they no longer have a designated person to make decisions for them. That is why it is important, no matter if you are 18 or 80 years old, to have both a Durable Power of Attorney (DPOA) and Healthcare Power of Attorney (HCPOA) to designate an individual(s) to make decisions for you if you are unable to do so yourself.

You designate a person(s) to handle your financial affairs in a Durable Power of Attorney. Most DPOAs are very broad, giving the person you designated broad authority to handle your financial affairs – for instance, managing your bank accounts, paying your bills, managing your assets, filing your tax returns, etc. However, you can limit this authority if you wish to. Additionally, a DPOA can either be immediate or springing. An immediate DPOA is effective immediately, while a springing DPOA is effective only after you are determined to be incompetent or incapacitated and unable to handle your own financial affairs.

You designate a person(s) to handle your healthcare decisions in a Healthcare Power of Attorney. It is important to understand that, like the springing DPOA, a HCPOA is only effective if you are incapacitated and unable to make decisions for yourself; if you can make decisions for yourself, those decisions will control. Generally, a HCPOA grants your healthcare agent with a general authority to make healthcare decisions for you; for example, that you have shared your wishes with this person and that this person will honor those wishes and do what is in your best interests. However, typically some of the more “hot button” issues are covered specifically in the HCPOA. For instance, whether your agent may consent to mental health treatment, long term nursing home care, removing your feeding tube, and if you are pregnant, whether or not they may still make decisions for you.

Also, typically included in a HCPOA is a Living Will and HIPAA consent; although, these may be in separate documents as well. The Living Will is where you detail your wishes if you are in a coma, vegetative state, etc.; for example, whether or not you want every life saving measure taken to prolong your life or if you want the proverbial so-called “plug pulled.” HIPAA consent is where you consent to certain people having access to your medical records.

Without either or both of these Powers of Attorney, if you are determined to be incompetent or incapacitated and unable to handle your own affairs, a court will have to be petitioned to appoint someone to handle your affairs. This is time consuming, costly and the person appointed may not be the person you would have chosen to handle your affairs. Take for instance the Terri Schiavo case. Most people remember this case; it is where Terri Schiavo’s husband and parents argued for nearly 15 years on what she may or may not have wanted. Terri was in a vegetative state and her husband had petitioned the court to remove her feeding tubes, while her parents petitioned the court to keep her alive. Terri had no living will; therefore, it was up to a court to make the decision for her based on what they thought she would have wanted. It took 15 years! And, who knows if the court got it right. This is not the only case like this, it happens more often than you think. Save your family the trouble and burden of having to petition the court to make these decisions for you, contact a professional today to draft you the necessary Powers of Attorney.

After Death

Your Powers of Attorney will no longer be effective once you die. This is where your Last Will & Testament comes in and governs who handles your affairs (in some instances). I want to take this opportunity to clear up one of the biggest misconceptions I hear when it comes to Wills – A Will governs your estate, meaning that it details how your estate is going to be settled in probate, for instance, who is going to manage and administer your estate, who your estate is going to be divided among, who you want to be appointed guardian of any minor children, etc. The key word there was “probate.” Many people think that if you have a Will, you avoid probate. That is not true. Additionally, many people believe that all of your assets will be governed by or “go through” your Will when you die. That is also not true. In Part 2 of this series I will talk about the different strategies to avoid probate. And, if you implement one of these probate avoidance strategies, your Will will NOT control who inherits those assets when you die, the document you used to avoid probate will. This is very important to remember.

It is important for you to have a Will for many reasons. The three primary reasons for most individuals are: 1) you designate the person you want to administer your estate, 2) you designate the people or organizations that you want to inherit your estate (and how they inherit it) and 3) you designate the individuals you want appointed as the guardian of your minor children. If you do not have a Will, the court will have to designate a person to administer your estate and to be guardian of your minor children. This is not only time consuming and costly, the court may choose someone who you may not have chosen. And, the State, via its intestacy statute, will choose who will inherit your estate and when and how they inherit it. The intestacy statute is based on who the State thinks you would have wanted to inherit your estate if you had a Will. Again, this may not be the individuals you wanted to inherit your estate, and even if it was, you may have wanted to put some restrictions on and/or have some control over when and how they inherit it. The probate process can be long and costly enough with a Will, save your family the extra trouble and burden of having to probate your estate without a Will, contact an attorney today to draft your Last Will & Testament.

Conclusion

Any plan starts with a good and solid foundation, and that includes your estate plan. The estate planning documents that every person needs for a good and solid foundation is a Durable Power of Attorney, a Healthcare Power of Attorney and a Last Will & Testament. Until you have these, any other estate planning strategies may be fruitless and/or supported by a weak foundation. Make sure to check out Part 2 (Probate Avoidance) and Part 3 (Trusts) of this series when I post them. And, lastly, like with any topic I blog about, I am only scratching the surface of these topics, you must contact a professional in order to fully consider how these estate planning strategies will play out in your individual circumstances.

I hope this helps!

-Matt

 

© 2015 Matthew D. Brehmer and Crummey Estate Plan.

Lifetime Gifts: An Important Estate Planning Technique (Part 2)

In Part 1 of this post, I focused on the similarities and differences between making annual gifts and making lifetime exemption gifts. Here, in Part 2 of this post, I will focus on the following reasons why it may still be important to consider making lifetime gifts:  

  • To minimize estate taxes;
  • To engage in Medicaid planning;
  • To provide for your loved ones during your lifetime; and
  • To decrease the size of your estate for easier estate administration after your death.

Minimize Estate Tax

Currently, in 2015, the estate tax exemption amount is $5.43 million. That combined with your spouse’s lifetime exemption amount if you are married, comes to $10.86 million. Therefore, for a vast majority of the population, minimizing estate tax is not even going to be on the radar. However, even though this exemption is permanent and indexed for inflation currently (and has been since 2010), Congress could always repeal it and lower the exemption amount; for instance, just seven years ago the exemption was only $2 million and if you look back another ten years before that, it was only $625,000. If Congress chose to go back to the “good old days,” a lot more of us would be subject to the estate tax. Keep that in mind.

For those of you who are unlucky enough (or, maybe I should say lucky enough) to be above the estate tax exemption, lifetime gifting is a great strategy to minimize estate taxes. Basically, by gifting assets away during your lifetime, either through annual gifts or lifetime exemption gifts, you are in essence “freezing” part of your estate. Consider the two following examples:

Example 1: You and your spouse have a $20 million estate today. You both live another 20 years, during which time your estate earns 6% annual interest and is now valued at about $64 million. Assuming the estate tax exemption increases at 3% during that same time, your combined estate tax exemption amount is about $19.5 million. Therefore, about $44.5 million of your estate will be subject to estate tax, which comes to about $17.8 million in estate taxes (at a 40% estate tax rate).

Example 2: You and your spouse have a $20 million estate today. Using $10 million of your combined estate tax exemption amount, you make a lifetime gift of $10 million, bringing the value of your estate down to $10 million. Assuming the same 6% interest, after 20 years, your estate is now worth about $32 million. And, assuming the same estate tax exemption amount as in Example 1 (about $19.5 million twenty years from now), you would have about $9.5 million of combined estate tax exemption left to use ($19.5 million – $10 million previously used). Therefore, about $22.5 million of you estate will be subject to estate tax, which comes to about $9 million in estate taxes.

As you can see from the two examples above, by making a lifetime gift, you can save a substantial amount in estate taxes; $8.8 million in the examples above. Furthermore, the two examples above are stripped down for ease of illustration; if you took annual gifts into account each year and also used up the increase in the lifetime exemption amount each year, the savings would be even more substantial (plus there are many other strategies that can make lifetime gifting even more effective, e.g., by applying discounts to certain assets when gifting).

The main reason why this works so well is because your estate is typically going to grow at a faster rate than the estate tax exemption amount (and the greater the arbitrage, the greater the effect lifetime gifting can have on your eventual estate tax liability). Basically, meaning that, when you make a lifetime gift and rid your estate of that asset, you also rid your estate of the accumulation that the asset is going to make over your remaining lifetime. So you are in effect, freezing the value of that asset and the amount of your lifetime exemption that it is going to offset.

However, there is one major caveat to consider here and when considering any other reason to make lifetime gifts. When you die with an asset in your estate, the asset receives a step-up in basis. When you gift an asset during your lifetime, the asset has a carry-over basis. Below are two examples that illustrate the difference:

Example 1: Years ago you bought an asset for $10. It is now worth $100. The day before you die you gift it to your child. Your child then receives a carry-over basis of $10. If your child were to sell that asset when it is worth $110, your child would be subject to long-term capital gains tax on $100 ($110 – $10).

Example 2: Years ago you bought an asset for $10. It is now worth $100. You die with the asset and bequest it to your child. Your child then receives a step-up in basis of $100. If your child were to sell that asset when it is worth $110, your child would be subject to long-term capital gains tax on only $10 ($110 – $100).

As you can imagine, that difference plays a major role when considering lifetime gifting. In some instances, it may be a deal breaker, and in others, it may not affect the decision as much. For instance, if you will be subject to estate taxes, it may be more beneficial to reduce your estate before you die even if your child would be subject to more capital gains tax on that asset because the highest long-term capital gains tax rate is only 23.8% (which includes the net investment income tax) compared to a 40% estate tax rate. However, if you are not subject to the estate tax, it may be more beneficial to keep low basis and high growth assets in your estate so that when you pass away, those assets will receive a step-up in basis and save your heirs substantial amounts in long-term capital gains tax.

Medicaid Planning

Nursing home costs are a major concern for many (and, with good reason, the national average nursing home costs are around $6,500 a month).  Long-term nursing home care can wipe out your entire estate pretty quickly. Therefore, Medicaid planning has become a large part of estate planning today. And, one of the most used Medicaid planning strategies is lifetime gifting.

Each State has its own complex set of rules when it comes to Medicaid planning with lifetime gifting and the rules are forever changing so it is important to contact an expert when considering this strategy. However, the basic strategy is this – to gift away your assets prior to the Medicaid look back period (depending on your State that look back period could be 3 years, 5 years, or some other time period).

There are a number of risks associated with lifetime gifting that are especially pertinent here. Once you’ve made a gift it is irrevocable. Meaning that the person you gave the gift to now owns it. You cannot get it back. Furthermore, the person who you gave the gift to is now at risk of losing it; for example, to creditors, to a divorcing spouse, to different heirs if they pass away, etc. This means that the person you gave the gift to may not be able to support you later on should you need it.

All of these risks are heightened during Medicaid planning. This is because if you don’t make it past the look back period, you will be hit with a penalty period based on the gifts given during that look back period. During that penalty period you will not receive support from Medicaid for nursing home costs, which could really leave you in a tough spot if you have no other access to support. Furthermore, if you never end up needing Medicaid and living a long life outside of a nursing home (like we all hope), you may no longer have enough to support yourself because you gifted it all away. Therefore, lifetime gifting as a Medicaid planning technique must be discussed with an expert to ensure you are weighing all of the benefits and risks associated with it.

Providing for Loved Ones During Life

Lifetime gifting may be a great way to provide for your loved ones during your lifetime. If an annual gift is less than $14,000 to any one person, not only will there be no tax liability, there is no requirement to file a Gift Tax Return. Even if the gift is greater than $14,000, there will be no tax liability so long as you have not used up your entire current lifetime exemption amount of $5.43 million. However, you will be required to file a Gift Tax Return to report a gift greater than $14,000 to any one person within the same year.

Lifetime gifts can be a great way for people to support their loved ones during their lifetimes without the fear of tax consequences or added responsibilities (like filing another tax return). However, you do need to consider the carry-over basis versus step-up in basis discussion above if gifting securities and/or property as opposed to cash.

Ease of Estate Administration at Death

Lifetime gifting may also be a great way to ease the administration of your estate at the time of your death. Typically, the smaller the estate, the easier it is to administer it at death. Furthermore, the type of assets that are held in your estate at the time of your death can determine how easy or how cumbersome administering your estate will be. If your estate is made up of entirely nonprobate assets, then administering your estate will be relatively easy. However, if you estate is made up of many different probate assets, then administering your estate will become more cumbersome and expensive.

By making lifetime gifts that reduce the value of your estate and rid your estate of probate assets, you can really lift some of the burden and costs that fall on your loved ones when having to administer your estate after your death. Again, however, you do need to consider the carry-over basis versus step-up in basis discussion above. Furthermore, you do not want to diminish your estate to a level where it becomes difficult for you to live day-to-day.

Conclusion

As you can see from above, lifetime gift planning is still very much alive in estate planning today. And, this holds true even for those who are not concerned about estate taxes. However, there are many things that need to be considered before making a lifetime gift and they should be discussed with an expert. But, if after weighing all of the risks and benefits, the scales are tipped in your favor, lifetime gifting can provide an important estate planning technique that starts to take effect prior to much of your other estate planning.

Thanks for reading!

-Matt

© 2015 Matthew D. Brehmer and Crummey Estate Plan.

‘Tis the Season for Gifting – Lifetime Gifts: An Important Estate Planning Technique (Part 1)

Prior to the substantial increase in the lifetime exemption amount, lifetime gift planning was a popular estate planning technique. In today’s estate tax environment, however, most advisors may not believe that such lifetime gift planning is required for most of their clients. But, estate planning techniques that involve making lifetime gifts, even today, are still very much alive. Some of these include the following: For those clients who –

  • May still be subject to the estate tax at death;
  • May want to engage in Medicaid planning;
  • May want to provide for their loved ones during their life; and
  • May want to decrease the size of their estate for easier estate administration after death.

Part 1 of this post will focus on a brief overview of the similarities and differences in making annual gifts as opposed to lifetime exemption gifts. Then, Part 2 of this post will focus on the above circumstances as to why someone may choose to make lifetime gifts even in today’s tax environment.

Annual Gifts

The annual gift exclusion is currently $14,000 per year for any and every recipient. This means that a taxpayer may give up to $14,000 per year to each and every person they wish. Furthermore, if the taxpayer is married, their spouse can consent to splitting the gift. This means that the married couple may give up to $28,000 per year to each and every person they wish.

A few important items to note regarding annual gifts include the following:

  • Any gift up to $14,000 (or $28,000 for a married couple) does not count towards your lifetime exemption amount. This means that you can give away up to the annual exclusion amount each year to as many people as you wish and never diminish your lifetime exemption amount.
  • Any gifts given up to the annual exclusion amount will be excluded from your estate. This means that they will not be counted as part of your estate after your death when determining whether or not you are subject to the estate tax.
  • Any appreciation on that gift will also be excluded from your estate. This means that if you gift a stock worth $100 to your child and, later, at the time of your death, the stock is now worth $150, not only will the $100 be excluded from your estate, but so will the $50 in appreciation ($150-$100).
  • Any gifts will have a carry-over basis to the recipient of the gift. This means that if you bought a stock at $100 and then, later, gift it to your child when it is worth $150, the child’s basis in the stock will be the same as yours, $100. This would result in $50 in capital gains subject to capital gains tax rates if your child were to later sell the stock ($150-$100).
  • Gifts may be made to either individuals or trusts (i.e., Crummey Trusts). It is important to note here that in order for the gift to be made to a trust for the benefit of someone, it must be a present, complete gift – see my previous blog post regarding Crummey Trusts. Also note, for example, that if you gift $14,000 to a Crummey Trust for the benefit of your child, you may not also use the annual exclusion amount to gift $14,000 outright to that same child in that same year. Whether the gift is given outright to your child or to a Crummey Trust for the benefit of your child or a combination of both, the maximum amount you can gift in 2014 is $14,000 to that child; that is, if you do not want to exceed the annual gift exclusion amount.
  • Any gifts made below or up to $14,000 do not require you to file an annual Gift Tax Return – Form 709. If the gift made to any one individual is greater than $14,000 in a single year, then a Gift Tax Return would be required to be filed.
  • If the annual exclusion amount for one year is not used, it does not carry over to the next year; if you don’t use it, you lose it. However, you will still be able to use that next year’s annual exclusion amount to make gifts.

Lifetime Exemption Gifts

The lifetime exemption amount in 2014 is $5.34 million ($5.43 million in 2015). This means that over and above the annual exclusion amount each year, you can gift up to $5.34 million during your lifetime without being subject to the gift tax. If you ever gift above this exemption amount during your lifetime, then you will be subject to a 40% gift tax. It is important to note that this is assessed against the gift giver; the one receiving the gift will not be subject to the gift tax (but may be later subject to the income tax or estate tax).

A few important items to note regarding lifetime exemption gifts include the following:

  • Gifts may be made to either individuals or trusts. Similar to annual gifts, you cannot exceed the lifetime exemption amount without being subject to the gift tax; how you spread out that exemption amount is completely up to you though. This means that you could give $2 mil to your daughter outright, $2 mil to your son outright, and $1.34 mil to a trust to be held for the benefit of your son and daughter. Also note that similar to annual gifts, special rules apply to trusts receiving gifts.
  • Any gifts made above the $14,000 annual exclusion amount (or $28,000 for a married couple) will count towards your lifetime exemption amount. This means that if in 2014 you give $114,000 to your child, $14,000 of the gift will be offset by the annual exclusion amount and $100,000 will offset your lifetime exemption amount, bringing that lifetime exemption amount down to $5.24 million.
  • Any gifts given will be excluded from your estate. However, any gifts given above the annual exclusion amount will be counted against your lifetime exemption amount at your death. This means that if in 2014 you gifted $5,354,000 to your child, $14,000 of the gift would be offset by the annual exclusion amount and $5.34 mil would offset your entire lifetime exemption amount but no gift tax would be assessed. However, when you later die, that $5.34 mil gift that offset your entire lifetime exemption in 2014 will also offset whatever the lifetime exemption amount is in the year of your death. Therefore, if you later died in 2015, you would only have $90,000 remaining for your lifetime exemption amount ($5.43 mil – $5.34 mil). Thus, any assets left in your estate at death above that $90,000 would be subject to the estate tax.
  • Any appreciation on that gift will be excluded from your estate and not count towards your lifetime exemption. This means that if you gift stock worth $5.34 mil to your child and use your entire lifetime exemption amount to do so tax-free and, later, at the time of your death, the stock is now worth $10.34 mil, only the $5.34 million will offset your lifetime exemption and the $5 mil in appreciation will not be included in your estate and will escape estate tax liability at your death.
  • Any gifts made will have a carry-over basis to the recipient of the gift. This means that if you bought stock at $1 mil and then, later, gift it to your child when it is worth $1.5 mil, the child’s basis in the stock will be the same as yours, $1 mil. This would result in $0.5 mil in capital gains subject to capital gains tax rates if your child were to later sell the stock ($1.5 mil -$1 mil).
  • Any gifts made above the $14,000 annual exclusion to any one person will require you to file an annual Gift Tax Return – Form 709. However, no tax will be due as long as you have not used up your entire lifetime exemption amount.
  • The lifetime exemption amount is just that, a lifetime exemption. Once it is used up, it is gone. However, under the current law, it increases each year (i.e., it is indexed for inflation). This means that if in 2014 you used up the entire $5.34 mil lifetime exemption, in 2015 you would receive another $90,000 in lifetime exemption because of the increase to $5.43 mil.
  • When you die, if you have not used up your entire lifetime exemption amount, your surviving spouse may elect to “port” your lifetime exemption amount. This means that if you die with $5.34 mil of unused lifetime exemption (i.e., your entire estate goes to your surviving spouse so that you don’t have to use any of your exemption), and your surviving spouse ports your lifetime exemption, the surviving spouse’s lifetime exemption in 2014 would then be $10.68 mil ($5.34 mil + $5.34 mil). Note that there are many different rules and strategies as to why a couple may or may not use portability, which will be discussed in a later blog post.

Conclusion

As you can see from the summary discussion above, there are many similarities, differences and little quirks to consider before making annual gifts and lifetime exemption gifts. Part 2 of this post will focus on some of those considerations and the different circumstances in which you may still want to consider and advise your clients to make lifetime gifts, even in today’s tax environment.

Happy Holidays!

-Matt

© 2014 Matthew D. Brehmer and Crummey Estate Plan.

Haunted By Student Loans: Students and Parents Beware

Grieving student loan borrowers across the country are finding out the hard way about a potentially catastrophic provision in many private student loan contracts: If the co-signer of the student loan dies, the loan holder can require complete and immediate repayment of the loan. Put differently, a student loan borrower who is making their student loan payments on-time, but whose co-signing parent (or other co-signer) dies, could be forced into default upon the death and be required to repay the entire loan immediately. The same is true if the co-signer declares bankruptcy. Furthermore, if the student loan borrower dies and has a co-signer, the lender can require the co-signer to assume full responsibility for the loan after the borrower’s death.

What lender would actually enforce such a provision? Not all that surprisingly, the Consumer Financial Protection Bureau (CFPB) said in a new report this past April that it has received complaints from student loan borrowers about being notified by their lenders that they have to fulfill their entire student loan obligation when their co-signing parent dies (full report available here). This is true even if their loans are in good standing and current. And, that’s not all; the lenders are also trying to collect from their co-signing parent’s estate (even if the student loan was not in default prior to the co-signer’s death). This could have a substantial impact on the size of the estate left for your loved ones after you pass.

However, it is not all that certain how often this happens. Richard Hunt, president and CEO of the Consumer Bankers Association, said that he is not aware of any lenders who practice this and called it a “rare occurrence.” It should be noted though that according to a recent report on private student loans published by the CFPB and the Department of Education, more than 90% of new private student loans were co-signed in 2011, often by a parent or grandparent; compared to only 67% in 2008. That combined with the increasing amount of outstanding student loans and the growing age of these co-signers, leads one to believe that this practice could become more than a “rare occurrence” in the years to come.

In addition, the CFPB stated in its report that based on the complaints from private student loan borrowers, the lenders were automatically placing these loans in default upon the death of a co-signer (i.e., immediately due in full). The death of a co-signer is usually determined by a third-party who conducts scans of public records of death filings, which are then electronically matched to consumer records and trigger a default, regardless of individual circumstances. Rohit Chopra, the CFPB’s student loan ombudsman, cautioned borrowers about the effects of such a default: “Borrowers need to be aware that these defaults can seriously impair their credit profile,” making it hard (or even impossible) to start a business, buy a house or buy a car.

Herein lies the problem: you have a student loan borrower who is making his/her payments on time and building his/her credit in order to obtain a loan for a business, house or car. Then misfortune strikes in the loss of a parent or other close relative (who is also the co-signer on his/her student loans). The student loan lender, by a search of the public records, discovers that the co-signer on this borrower’s loan has died and immediately, without consideration of the individual circumstances, places the borrower’s loan in default and calls for its full outstanding balance to be paid. Most borrowers will not be able to meet such a demand and this will destroy their credit for years to come. Their plan to start a business or buy a house will be delayed, if not, completely destroyed, all because of this little provision put in their student loan contract. And, not only that, but if the student loan lender collects from the deceased co-signer’s estate, it could substantially impact the amount left for the deceased’s loved ones. All but for this provision, this borrower may have been able to pay back his/her entire student loan balance in on-time payments like he/she was doing before the death of the co-signer.

Luckily for students and co-signers, you don’t have to wait for the private student loan lenders and the politicians to come to any agreement about how to best fix this problem. You can be proactive now. Many private student loan lenders do offer an option to release a student borrower’s co-signer after a certain period of on-time, consecutive payments and a credit check to determine if the student is eligible to repay the loan on his/her own. If your lender offers a co-signer release, you will want to ask about this benefit and remove your co-signer as soon as you are eligible.

However, many of the complaints that the CFPB received were from borrowers describing the many obstacles they faced when seeking to obtain such releases. In addition, many of the complaints stated that while borrowers often have to apply for the release, the lenders and servicers generally do not make the criteria for the co-signer release clear and transparent; nor do they make the required forms available on their websites or in electronic form.  Moreover, lenders are not notifying students when their loans qualify to have the co-signers released.

While getting a co-signer released may seem like a daunting task, private student loan borrowers and co-signers should be proactive and try to obtain such a release. The CFPB has even released sample letters for both the borrower and co-signer to complete and send to their private student loan lenders (available here). Another option that you may want to consider is buying life insurance to cover what the outstanding balance of the loan may be on the death of either the student or co-signer. While it may be a relatively cheap option to purchase life insurance for a young borrower, it may not be for an older co-signer. If insurance is purchased it is important to make sure that the benefits are payable to that individual’s estate or are assigned by the beneficiary to settle the student loan debt. This should minimize the impact on your estate and loved ones if you were to pass away and the student loan lender required immediate and complete repayment of the student loans.

While we wait for more guidance on this issue, it is up to you to protect yourself. At the very least, the borrower and the co-signer should be inquiring from their private student loan lenders about how to apply for or obtain a release of the co-signer. This can be accomplished by placing a phone call to your lender or by completing and sending one of the sample letters that the CFPB provides on its website.

– Attorney Matthew. D. Brehmer

 

© 2014 Matthew D. Brehmer and Crummey Estate Plan.