Consequences of handing out inheritance prior to death?
 

My neighbor up north is an elderly woman. She has three adult children and wishes to split her estate up evenly amongst them. While sitting on a very healthy high 6-digits in various savings accounts and a paid off house, she is also sitting on an ever climbing 900,000 in investment funds with a large national advising firm.

While she understands she can give $18,000 a year to each without penalty incurred by any party, the is entertaining the idea of disbursing her 900,000 prior to death. This is due to her concern about the way the world is going, the wars, economic instability, dollar de-valuation, inflation, etc.

While under Trump there was something about up to 20 Million could be inherited without tax or fee consequence, she asked me about whether or not she could disburse the 900,000 without incurring any fees or tax consequences to her or the recipient children.

My amateur opinion is that the $300,000 each would be a taxable income event unless it were inheritance doled out after she passed away. That would cost each recipient approximately $65,000 in taxes (assuming combined Fed and State rate of 25%).

Are my initial thoughts on this accurate, or are there additional considerations and fiscal dynamics that would be at play in her scenario?

She should ask a CPA.

She can gift and the excess (over the $18k) can be applied against her LifeTime exemption.

Must file with IRS.

yes, as I was given this information from a CPA, so its a second hand solution which should be done by an elder law attorney to avoid a successful governmental challenge.

The elderly woman gives an interest free loan of X amount to each / any child
Any loans are forgiven at death in wills and trusts.

You are welcome.

good luck

finance guy who learns tax stuff by experience and discussions with CPAs and lawyers
and is currently solely managing investments and distributions and taxes of two trusts,
both now irrevocable.

The current estate tax limit is $13.61 million. As long as her estate is not higher than that, she can give away all of it either now or after death and there will be no taxes owed by either her estate or her heirs. If the money is given as a gift, the receiver doesn't owe any tax. Gifts are not taxable income. However, there may be capital gains consequences when sold, if the gifted assets have a taxable cost basis. I would definitely recommend that she consult with an estate planner before gifting her assets.

Appreciate the input. I already strongly suggested she consult with her tax and financial advisors. I'm not sure why she asked me about it instead. My best guess is she knows we have the two houses so thinks we might know more than we actually do know.

She needs to talk this over with an estate attorney - or three and perhaps a financial advisor. This scares me. If her assets were ten times as much I can see her advancing some funds. She could burn through $900K in assisted living if she requires it. She should definitely refrain from giving away appreciated assets during her lifetime because under current law they will receive a stepped up basis to her heirs upon her demise. Question: How is she cognitively?

Retired guy is right , I’ve been giving money since I was 75 ,now in mid 80’s , I’m a true believer in the old proverb “better to give with an open hand , then a closed casket” . But man about town has the right idea also. I’m in perfect health so after I pass 100 , maybe I’ll have to slow the gift giving down

If she disposes her assets prior to becoming cognitively impaired, she will be eligible for Medicaid from the state. There is a time limit of 5 years (from memory no pun intended) from giving away all, to being eligible for Medicaid.

Now, for medicaid reimbursement for medicaid fraud, the state will put a lien like claim on the property, etc though probate court, but with no assets, the state can't recover much, if anything. So if she gives away assets other than the house, a loan would not be the best way, and keeps her house only, the house in a trust would avoid probate and MAY be eligible for medicaid without selling the house, OR sell the house and pay for assisted living from that until eligible for medicaid. .

There are solutions, but elder law attorney is the best. . FYI assisted living where my mom is increases their annual rate at 7-15% a year, which compounds very quickly. starting at 10K per month this year. . and she has been there cognitively impaired for three years and surpassed the life expectancy living with dementia/alzheimers . .

good luck

sportsonlyguy

My family knows that when we pass if there is anything left we screwed up. :)

I would never advise someone with a net worth of over $1 million to endeavour to become eligible for Medicaid.

EDIT: Comments below are OBE. Apparently, you can essentially distribute your estate while you are still alive. See IRS form 709 and its instructions.



Definitely want to talk with a tax attorney about this.

Typically, the recipient of a gift does not pay tax. However, that doesn't mean tax is not owed. If the gift value is higher than the annual exclusion then tax will be owed and it is typically the donor who is required to pay.

Whether the $300,000 is given and the child pays the $65,000 or if the $65,000 is deducted first, the child will end up with $235,000 and the IRS with $65,000. At least that's the way I read the IRS information on gift taxes. On the other hand, I am not a tax attorney.

Note that the annual exclusion only reduces your lifetime estate exclusion from the $13.61 million lifetime limit, and requires you to file a gift tax return with the IRS. It does not trigger any estate tax for you or the recipient until your gifting exceeds the lifetime limit. For example, if you give $100,000 to an individual this year, your lifetime estate limit of $13.61 million will be reduced by $82,000 ($100,000 minus $18,000), but you would owe no estate tax. The only reason to file the gift tax return is to document that the lifetime exclusion has been reduced.

Even if you have a billion dollars, you can give it all away while you are still alive as long as you give no more than $18,000 per year per recipient, and pay no estate tax. And, when you die, you will still have an estate tax exclusion of $13.61 million. After death, the $18,000 annual exclusion is no longer available, and the entire estate, less the exclusion, is taxed.

The OP wrote she had high six digits in bank accounts and about $900 in investment accounts. The stock market has become very pricey, high P/Es and so on. It could take a hit anytime IMHO. Her $900K could shrink literally overnight to, who knows, $700K or even $300K. A rising tide lifts all boats/ships which is what we have experienced over several years. But when the tide goes out...

I don't think a person could live long enough or have enough children to give away $1B in chunks of $18,000/child/year. But yes, I understand the point.

The basic exclusion calculation was hard to find. The IRS says gift tax yes, unless no, but maybe yes, except for basic exclusion, which was increased in 2018, but significantly decreases in 2026, and then is only explained on the form but is explained in IRS-speak which is barely intelligible. Ultimately, it looks like you are correct but it sure isn't easy to figure out.

Cognitively she is pretty sharp. Mid-90's and has not only a low 5-digit monthly pension income, but also paid lifetime medical insurance AND a long term care insurance policy.

I appreciate the information about the basis step ups, that would be very important. She has promised she would speak with her CPA. I envy her position, but glad I don't have to make her decisions.

She is exceptionally fortunate in many ways. I am happy for her.

Agree and/or a tax attorney.

First of all, the recipients do not need to be your child. It can be anyone.

The official name is the "Unified gift and estate tax". Gifts are made before death and your estate is the amount left over after death. But, it is all included into one tax liability. The $18,000 annual exclusion only applies to gifts made while you are alive. But, you can gift more than $18,000 per recipient as long as you don't exceed the total estate tax exclusion during your life, which is currently $13.61 million.

My first thought when I read the question is whether this giveaway is being suggested by the heirs.

For those who have reached a point where they have money to give away, they can always give away some for certain circumstances like helping with a down payment on a house or buying a car or making a dent in a grandchild’s tuition or kicking in for a remodeling project. It is nice to see your money work for those you love, but I would NOT just hand it all over.

Besides, a million is not what it used to be. Go slow on this one. Line up the ducks.

Boomer

As I remember from when I worked in a private school, she can pay the tuition for a grandchild (or great grandchild) and it does not affect any gift tax limits, as long as it is paid directly to the school.

Also, she can gift $18,000 to a child and another $18,000 to the child’s spouse annually.

What you don't know is how long that million will last in under different scenarios, and under certain scenarios, a person with a million can end up on medicaid if the assets aren't maximized for income to offset the rising costs and the person lives long enough. My mom has burned through over $300K in three years in a dementia locked facility, and will go through $500K in another 3 years. . in 4 years from now that million is zero and now she is on medicaid. The hospital only allowed her to be released on hospice, but the will graduate from hospice this spring. . . you just don't know. If I had opted to have 24x7 nursing care at home, that would have been $600K over 3 years, and then in two years, she would be on medicaid, in a locked facility.

I worked with someone whose father is on medicaid for dementia. His father lived with the colleague in his home. Medicaid paid for his living expenses, but he was not in a nursing home or anything like that. Too many pre conceived notions about certain outcomes. Now he didn't have a million, but he lived as normal a life as he was able to do whatever he wanted while living in his nephews house.

People who put all their money in medicaid untouchable trusts, certain types of irrevocable trusts, are also eligible for medicaid support.

What the decision comes down to is:
how do you value your money?
how do you think/feel about not depending upon it but give it to family members who can use it productively when they need it more than you do?
How long do you think you will live and how do you think you will die? (impossible to answer but worth a try)
If you can't live by yourself, are you counting on your offspring to take care of you? If not, who is going to take care of you?

My parents saved most of theirs and seldom helped out any family members with money.
My wife's parents gave away most of their money to their children to use when the parents didn't need the money.

Everyone is different, and there is no one right answer, there are scenarios to plan for or not if you choose.

Interesting discussion for sure to listen to different responses on how people think about the future, and the future is always uncertain, sometime more uncertain than at other times.

Ask a 100 of us and get 100 different answers.
Go get a legal answer, advice, and any documents that might be needed, from Amy Pittman at Pittman Law right around the corner in nearby Oxford.

Why not make a loan to each of her children that is of course forgiven at time of death?

Thanks for the anti thread comment authority-biased answer, but we prefer to discuss the issues prior to discussing it with a professional so that we have some idea of what the concepts might be to discuss with a professional. Its like studying up with buddies in high school prior to a presentation or quiz.

discussing and acting are two independent activities, both or just one can happen. . and if you read carefully, the OP isn't going to spend his money on other people's problems.

Look though I'm sure the information you have been given on the site is with good intention and maybe helpful.
But I would strongly suggest you go to your attorney and/or your accountant if you have either or both.
The situation you are in is common here in The Villages.

If she has 3 people she wants to split the estate with, she can arrange her accounts plus house into fairly equal parts, then add each person to one account as a beneficiary. Any account including checking and savings can have beneficiaries including the deed of the house. This would keep these accounts out of probate court and avoid state estate/inheritance taxes.In PA my brother and I paid 4.5% when my mom passed. All states are different. This is PA rules:

4.5% for transfers to direct descendants (lineal heirs), 12% for transfers to siblings, and 15% for transfers to other heirs

I got all this info from Dean and Dean here in TV.

BTW, giving the $300k to each prior to her death, she will pay regular income tax on the full value… not a good idea. Consult a family law attorney…

What is described here is state inheritance tax, which is different that state estate taxes.
An inheritance tax is imposed upon the receivers of inheritance after distribution.
An estate tax is imposed upon the value of the descendent's assets prior to distribution.

States that currently impose an inheritance tax include:
Iowa
Kentucky.
Maryland.
Nebraska.
New Jersey.
Pennsylvania.

MA has an estate tax above $2M, raised from $1M last year. That's why many people have retired to FL, to avoid taxes . .

FL has no estate taxes of which I am aware

She can gift this to her children. File the appropriate tax form and there are no tax consequences.

Again, when you give money to someone, there is no income tax owed by either the giver or the receiver.

Check with "Probate Attorney"
 

Your neighbor should check with a Probate Attorney and a CPA in her state who can advise her of both Federal and State Tax implications. Responses on this forum are "opinions" only, but your neighbor needs the FACTS.

Couldn't she divide the cash assets into 3 accounts and have intended recipient be joint owner on the account?
Upon her passing the joint owner becomes the primary?

As CoachKandSportsguy said her best bet is to see an elder care attorney. They are worth the time. The laws are constantly changing and the attorney would probably tell her to check in every few months to make sure that everything is good and let her know if any changes need to be made.

If your neighbor is interested in maintaining generational wealth, she may want to consider establishing a Trust so that it specifies the conditions that family members may access the money. However, simply dividing it up among the kids may in fact be a quick way to rapidly deplete the entire amount.

The following article is an interesting read to get a better idea of how wealthy families maintain their wealth over many generations.

How Wealthy Families Use Trusts to Protect Their Wealth - Ken Majmudar

Seeking financial advice on this forum from anonymous sources (most of whom could not identify the front of a one dollar bill) is tantamount to extreme foolishness.

Along those lines, here is my best advice: "She should give it all to me. I will see that she is taken care of during her life and that her kids will get the remainder." Signed Wile Coyote.

She really needs to consult with an elder care attorney -- if she needs to go into a nursing home -- it can be challenging because they look at your income and assets over the last several years -- in addition, a financial advisor with an understanding of the financial impact to her and her beneficiaries needs to be carefully considered - this is not the forum for advice -- qualified elder law attorney and financial advisors would be able to view her entire situation

Refer her to a professional.

Why isn't she/you asking her financial adviser or attorney?

Joint owners
 

My question exactly...............the joint owners could draw from the accounts now...........BUT, there has to be a lot of trust between the persons........could buy them houses with both names on the deed and could buy cars and payoff debts and nothing is reportable. Its doable............. I guess its a good position to be in...blessings


.no government mtninvilved also could payoff all the kids debts

A gift tax return is required when the $18,000 is exceeded. It's not optional as indicated.

Gifts carry with them the donor's basis; inheritances carry the fair market value at date of death ( or six month later if elected).
Give cash away; not stocks, bonds, houses, land..... So maybe it's not a good idea to give away the entire estate before death.
I've had residences inherited that when sold threw off a tax loss.

A couple could give $72,00 a year to their married child and spouse if done right.

Confirmed no tax of gifts to the receiver, only a requirement to file a gift tax return if the annual limit is exceeded.

Loans are not the way to go. A loan would require interest to be paid - taxable income to the lender, probably no tax deduction to the borrower.


Titles to property are critical - whether held in joint name or joint tenants with right of survivorship or other.

From a CPA