Gift Taxes in a Nutshell

Title Deed with keysWhen does my generosity, or my desire to give gifts during my life, trigger the application of federal tax laws regarding gift taxes? Consider the following scenarios:

  • Declan wants his daughter Fiona to receive his residence at his death. He and his late wife purchased the property for $30,000 in the early 1950s. He signs and records a deed in 2015 that conveys the property to himself and Fiona as joint tenants. As of the date of the conveyance, the property is worth $300,000. He continues to reside there and to pay all property taxes, insurance and maintenance.
  • Teresa opens a bank account in 2014 and transfers $500,000 to the account. She names herself and her son Juan as joint tenants with right of survivorship at the time she opens the account. Under the account terms, both Teresa and Juan have the right to withdraw the entire amount of the bank account at any time. Juan does not withdraw any funds from the account the first year. He withdraws $40,000 in 2015 to pay his college tuition.

Has Declan or Teresa made a taxable gift? If so, when was the gift made and for how much? Could either of them have achieved the same result but avoided the gift tax rules?

The gift tax is a tax imposed on certain gifts made during life. Not every gift is taxable. The IRS allows a generous annual exemption, currently $14,000, per donee. This means you may give up to $14,000 each year to an unlimited number of recipients without having to file a gift tax return. (The amount was established at $10,000 and is increased periodically for inflation; it has been $14,000 since 2013). Also, you may give unlimited gifts to your spouse (if a U.S. citizen) or to §501(c)(3) charities without incurring a tax. You may also pay tuition for education and medical bills on another’s behalf without tax consequence if you pay such amounts directly to the educational institution or health care provider.

Even if you make gifts that are taxable, Congress has provided for a unified credit that allows you to make otherwise taxable gifts throughout life and at death up to a sum total of $5,450,000 (for those who die in 2016) without paying a gift or estate tax. The credit is “unified” in the sense that it is applied both to gifts made during your life time and to gifts made at death from your trust or estate, up to the maximum credit. Each year the unified credit is adjusted upward for inflation. Gifts made above that amount are taxed at a whopping 40%.

Returning to our examples, the fact is that both Declan and Teresa have made taxable gifts that require a gift tax return to be prepared and filed with the IRS; and both could have avoided this result with some good legal advice and planning.

Declan has made a taxable gift of one half the value of the real property, or $150,000, to Fiona. He can count the first $14,000 toward the annual exclusion, but he still must file a gift tax return for the remaining $136,000. Even worse, since the transfer was made during his life time, if and when Fiona sells the house after his death she will have to pay a capital gains tax on the increase in value from the $30,000 purchase price. Had Declan conveyed the property to her at his death, she would have received a step up in basis, meaning the base price for considering a capital gains tax would have been the value at his date of death, rather than the value of the original purchase in the 1950s. This would have been a huge tax savings to Fiona. It would also have eliminated the requirement of the gift tax return.

Teresa makes a gift of $40,000 to Juan in 2015 when he withdraws that amount from the account. She must file a gift tax return for the gift, after offsetting the amount of the annual exclusion. The joint bank account is treated differently than a joint tenancy in real property; until and unless Juan withdraws money from the account over and above any contribution he may have made to the account, there is no gift because Teresa can still withdraw the whole amount. Here, Teresa could have paid Juan’s school directly for the tuition without any gift tax consequence.

Note that for both Declan and Teresa, assuming no previous gifts have been made, no actual tax is due because the unified credit will cover these relatively modest amounts; but the hassle and cost of preparing the gift tax return could have been avoided. Moreover, if either has an estate that will exceed the unified credit at the time of death, these gifts will have negative consequences for their estates.

If you are thinking of making a large gift, it is well worth consulting with your accountant or estate planning lawyer to ensure you take advantage of the gift and estate tax rules to minimize or eliminate your tax liability.

Small Estate Affidavits; Or, How to Know If Someone Has Authority to Act on Behalf of an Estate – Part II

scales-of-justice  In my previous blog post, I addressed how you know whether someone has authority to act on behalf of an estate. I explained that letters testamentary, provided they are recently certified, furnish proof that the person in question has been appointed executor or personal representative of the estate. What if the person presents not letters testamentary but an affidavit?

Suppose for example that you are a bank clerk in Twin Falls, Idaho. A woman comes in to your branch and shows you an affidavit saying that a bank customer who was a resident of Elko, Nevada has died and she is entitled to receive the whole of the customer’s estate. The account has $9,000 in it and there is no “pay on death” beneficiary. The affidavit is supported by a will purportedly signed by the customer and leaves everything to the woman in question, who is a cousin of the decedent. It also identifies a vehicle of the decedent. The affidavit purports to be made pursuant to NRS 146.080.

What should the bank clerk do? How does the clerk know if the affidavit is true? Should the clerk get more documentation? Can the clerk demand a court order instead of the affidavit?

NRS 146.080 allows a beneficiary of a will or an heir of an intestate estate to obtain the decedent’s property if the decedent left less than $20,000 (excluding sums due for service in the armed forces) and no real property in decedent’s individual name. An affidavit can be used if at least forty days have elapsed since the decedent’s death. It must identify the affiant (the person making the affidavit) by name and address and state that the affiant is entitled to the decedent’s property. The affidavit has to state, among other things, that there is no petition for the appointment of a personal representative pending in any jurisdiction nor has any such petition been granted, and that all of decedent’s debts have been paid or provided for. It must describe the personal property claimed. It must state that the affiant has given written notice by personal service or certified mail, identifying the affiant’s claim and describing the property to all persons whose claim is equal or greater than affiant’s, and that fourteen days have elapsed since such notice was given. Additional requirements are listed in the statute.

Effective October 1, 2015, the small estate affidavit rules have been revised to allow a surviving spouse to obtain property up to a value of $100,000, and any other qualified person to receive property up to $25,000 by this method. The legislative changes also provide that the affidavit must state that the affiant has no knowledge of any existing claims for personal injury or tort damages against the decedent. Finally, the value of decedent’s motor vehicles is now to be excluded when calculating the value of the estate. Note, however, that the DMV will still need to see the affidavit and the affidavit must identify any and all vehicles that the affiant wishes to transfer.

Back to our example: if the affidavit is properly completed and the bank clerk has no reason to believe anything is amiss, it is proper to give the money to the person presenting the affidavit. The bank fulfills its obligation to the heirs or to the estate if it relies in good faith on the affidavit. That said, very often banks and brokerage firms outside of Nevada are not familiar with this provision of Nevada law and do in fact insist that a court order be obtained. If the bank refuses to turn over the account, the beneficiary may have to file a petition in court to set aside the account to herself.

If you are presented with a question about whether a small estate affidavit is valid under Nevada law, you should consult with a Nevada probate attorney before taking action.

How to Know If Someone Has Authority to Act on Behalf of an Estate

banner-1[1]            How do you know whether someone has authority to act on behalf of an estate? Suppose the following scenario: You own a jewelry business in Fallon, Nevada. A customer orders an expensive ring and pays for it up front. She dies shortly thereafter, prior to delivery of the ring she purchased. The customer is owed a refund. A few weeks later a young man shows up at your store and says he is the customer’s son and he wants to collect the refund. He shows you a copy of a will purportedly signed by the customer that leaves everything to him. The will states that the son is to be the executor. It expressly disinherits the customer’s other children. The son offers nothing else to support his request that you issue the refund to him personally.

What if you give the money to the son and later find out that the will was invalid, the customer’s daughter is appointed personal representative of the estate, which proceeds by intestate succession because no valid will is ever found? What if the son was actually raised by his father and step mother and had been adopted by his step mother? Would payment of the money to the son discharge the jewelry store’s obligation to refund the customer?

Nevada law provides for procedures by which a will is presented and admitted to probate and an executor or personal representative is appointed to administer the estate. A will by itself is not adequate to support a request for property belonging to the deceased. Why not?

First, because the will may not be valid. It may not have been properly witnessed. It may not be the last will and testament; it may have been revoked by a later will. It may be phony altogether. It may be real, but the product of undue influence or incapacity. By filing a petition in the county court where the deceased resided and giving notice to all interested parties, these issues may be raised and adjudicated. Only after the court has examined the will for validity and all interested parties have had the opportunity to raise any issues that may exist does a court admit a will to probate.

Second, perhaps the will is valid but the person presenting it is not the proper representative of the estate. The fact that the person is named in the will to be the personal representative does not mean he is qualified or has been appointed. Sometimes the person named in the will to act in this role will not be appointed by virtue of having been convicted of a felony, or because he has a conflict of interest or is improvident. Even if the person qualifies, he must actually be appointed to act before he has authority to collect debts owed to the Estate.

How does someone demonstrate he or she is the personal representative of an estate? In an estate where a will is admitted to probate, a personal representative receives letters testamentary. The letters testamentary demonstrate the authority to act on behalf of an estate. This is a short document that is issued by the court and contains an oath signed by the personal representative. It should state any restrictions on the authority granted on the front page. It should also be certified by the court, meaning it has the court’s seal and a stamped statement on the back verifying that the letters are both genuine and current.

Third, even if the will is valid, the decedent may owe money to creditors. Numerous costs must be paid before beneficiaries or heirs receive a share of an estate. These include costs of administration of the estate, costs associated with the decedent’s final illness and with burial, and creditors’ claims. Following proper court procedures ensures that these costs are properly paid before any distribution is made to beneficiaries or heirs.

So—what should the jewelry store do? Without evidence that the son has authority to collect the money on behalf of the estate, such as letters testamentary showing he has been appointed personal representative of the estate, the store should not give him the refund. Payment to the son will not satisfy the obligation to refund the money to the customer; only the customer’s personal representative has authority to collect the money. The store owner should ask the son for current, certified letters testamentary. In the alternative, if the estate is small, the son may furnish what is called a small estate affidavit—this option will be the subject of Part II of this blog post.

How might this have played out if the store did not follow the sage advice contained in this blog? The store cut a check payable for the full amount to the son. Thereafter, the daughter petitioned for appointment as the personal representative of the estate. A will similar to the one presented to the store was presented for probate by another relative, but it was never admitted to probate because it was invalid on its face for defects in the witnesses’ signatures. The estate proceeded according to intestacy laws and the son was not entitled to inherit at all—because he had been adopted by his step-mother, and adoption severed the natural right to inherit from his biological mother. The personal representative sued the store on behalf of the estate for a refund.

If you are presented with a question about whether someone has proper authority, the best course of action is to consult with a qualified probate attorney before taking action.

When Should I Do My Estate Planning?

carpe-diem  Today is a good day to start thinking about your estate planning. Who should have a will or trust in place? Do I need this now or can I put it off?  Do I need some kind of health care document? What about powers of attorney? There are lots of questions to consider.

  1. No Estate Planning. If you have never done any estate planning, you should consider at least creating a will and putting in place a health care power of attorney and a regular power of attorney. A will allows you to name a relative or friend you trust to handle your affairs after your death. It also gives you the opportunity to direct how your estate will pass at your death; you can omit disfavored relatives, or include relatives or friends who would not otherwise inherit from you if you died without a will. You can also direct that beneficiaries receive a different share than what the law would otherwise provide, or that certain persons receive particular assets.

If your assets are more significant (neighborhood of $200,000 or more), you should also consider creating a trust in which to hold your property. This can minimize taxes, and if properly funded, will avoid the expense of a court supervised probate proceeding—which is generally required when only a will is in place.

You should have a health care power of attorney in place to nominate the person(s) you want to make decisions for you if you become unable to do so, and to express your wishes as to what kind of medical treatment you want and whether or not you desire food and water even after medical treatment has ceased. A power of attorney for financial matters is also helpful and can avoid the necessity of a guardianship should you become incapacitated.

  1. Minor Children. If you have minor children, you should definitely have a will in place. Even if your assets are not significant, a will can (and should) contain a clause that appoints a guardian for your children should you die. This allows you to plan for your children so that there will be a smooth transition at your death. Under Nevada law, the only place to nominate a guardian for minor children is a will. You should, of course, ask the persons you wish to nominate in advance to make sure they are willing.
  2. Outdated Estate Planning. If your estate planning was done a long time ago, you should review it to see whether there are any changes you would like to make to those you have designated to take care of trust or estate business after your death, and to those who will receive your property. Also, tax, real estate and other laws affecting trusts and estates change over time, sometimes quite dramatically. Even if you have no changes to the substantive provisions of your estate planning documents, you should have a lawyer review your documents every couple of years or so to recommend any updates.
  3. Major Life Change. If you have recently been through a major life event such as marriage or divorce, or if there has been a death or a birth in your immediate family, you should get your estate planning in place or have it updated. A new spouse should either be included in your estate planning as receiving something, or should be mentioned in a way that makes it clear the spouse is not intended to be included. In Nevada, there are statutory provisions that revoke a will or beneficiary designation made in favor of a spouse upon divorce from that spouse; but it is best to re-do your estate planning after divorce rather than to rely upon the statutory revocation. Similarly, the law makes certain provisions for what happens to gifts when the intended beneficiary has died before the person making the will, and for additional family members who are later born; but the law may or may not express your preference.

In sum, seize the day! You do not know how long you will live or when you will die. You will buy yourself peace of mind and you will save your relatives and loved ones a lot of trouble by doing proper estate planning now. To begin the process, contact a qualified estate planning attorney today.

The 4 P’s of Protecting Your Family’s Legacy Home

Lake CabinThe lakefront home, the mountain cabin or the ocean-side estate all require special planning to protect and enhance these legacy homes. From Lake Tahoe to Donner Lake, from downtown city condos to Pacific Ocean properties, we advise our clients to give special attention to these legacy homes. These special properties need the “four P’s:” protection, privacy, probate avoidance and planning.

Protection:

These types of properties need comprehensive insurance coverage for potential damage to the structure, adequate liability coverage and an ownership structure that provides protection from outside creditors. Under Nevada law, limited liability companies (LLCs) offer tremendous protection, particularly if you or your family rent or lease the legacy home. A Nevada LLC may not prevent a lawsuit, but it will certainly deter potential creditors.

Privacy:

You and your family may not want to divulge the ownership of the real property. Nevada counties have very transparent real property records. Anyone with basic internet search skills can locate the owner of real property, past and present, and the price paid for the real estate. To provide a privacy shield, ownership of the legacy home can be held by a legal entity such as a trust or LLC, with a name unconnected to the family. You should consult with a lawyer to determine which device, trust or LLC, will best meet your objectives as simply titling your legacy home into an existing business entity is not a great solution. Doing so could subject your legacy home to the claims of existing or future business creditors.

Probate Avoidance:

Many people understand the primary benefit of a revocable living trust is probate avoidance. What many do not understand is that a revocable living trust can hold title to real property, like legacy homes, in other states. Families with real property in more than one state must have a trust to avoid probate. An existing revocable trust could be a ready-made device to hold title to your legacy home.

Planning:

Plan now if you want to keep the legacy home in your family. If you do not provide directions or instructions to your family, anxious beneficiaries can force the sale of the legacy home. You must establish a clear succession plan establishing how the property will be managed, maintained and eventually distributed to the next generation or beyond. Please contact a qualified estate planning attorney to discuss how to preserve and protect your legacy home.