So one of your children is struggling with their finances and you decide to help out. Without getting into the question of whether it ever makes sense to become the family bank, there are things that you should probably think through before writing that check.
Was this a gift? a loan? or an advance? The difference being:
A GIFT doesn’t have to be repaid. Ever.
A LOAN has to be repaid, under whatever terms you agree. And if unpaid, it remains an obligation to your estate at death.
An ADVANCE is an offset against an inheritance when you die.
The reason to decide is because, sure as it snows in Muskegon in January, when you die, someone will remember this transaction and seek to have it treated as an advance against that person’s share of your estate. It’s one of those issues that comes up all the time in estate and trust administration, and except in cases where the gift giver has been perfectly clear about the nature of the event, these situations frequently give rise to unpleasant family disputes.
Being clear about the nature of these arrangements in your estate plan is the best way to avoid these types of conflicts when you die.
And that’s not all. Other concerns also arise when people, especially older people, give away their money. These include:
Many people wonder whether there are taxes due when gifts are made.
Generally speaking there is no tax associated with making a gift. No tax to the person making the gift and no tax to the person receiving the gift.
That said, gift taxes can come into play when very wealthy people make large gifts. These rules only apply to people who have wealth in excess of $11,400,000 (2019 figure). For these lucky folks, giving more than $15,000 in a calendar year to any individual will result in a reduction in the federal estate tax credit that is calculated when you die.
Way too many people worry about this issue. But if this applies to you, you definitely need legal advice before making large gifts.
Another tricky issue that often arises when older people give money away comes up when their health declines and they seek assistance through government programs such as Medicaid and some benefits provided by the Veterans Administration.
These programs will penalize people who made asset transfers before seeking benefits, if those transfers were made during their so-called “look back” periods – the period of time before application when asset transfers are reviewed.
Divestment rules are complicated, and different depending on the program involved. There are exceptions. But there are also traps that end up causing unexpected problems.
There are several ways that gifts give rise to legal issues. While those decisions seem personal and innocent at the time, estate planning lawyers often see these decisions give rise to unanticipated problems down the road. When you’re thinking about giving away your money, it may make sense to talk to your lawyer.