Many people are unfamiliar with gift taxes. Here are some of the basics:
If you receive a gift you don’t owe tax, and you don’t have to report the gift as income.
The recipient of a gift doesn’t owe gift tax or income tax and does not have a reporting requirement. Gift taxes are the responsibility of the donor. Except for the ones to charitable organizations, gifts are not deductible by the donor.
Not all gifts are required to be reported, and even fewer actually result in a gift tax liability.
Gifts that are always exempt from taxation include gifts to IRS-recognized charities, gifts to spouses (if they are US citizens), gifts to political organizations, and gifts to pay a person’s education tuition or medical expenses (but only if paid directly to the educational institution or medical facility – not to the individual).
There is an annual gift tax exclusion that eliminates many other gifts from taxation.
Gifts that don’t fall into one of the previous exempt categories and don’t exceed the annual exclusion are not subject to gift tax. For 2019, taxpayers may give up to $15,000 per donee without gift tax consequences and without any reporting requirements.
Gift-splitting allows a married couple to combine their exclusions so that in 2019, they may give up to $30,000 to each donee.
Lifetime Exclusion – Unified Tax Credit
Gifts in excess of the annual exclusion should be reported annually on a gift tax return. But they probably will still not result in a gift tax liability because of the unified credit. Every taxpayer is permitted a lifetime amount which they may give in the way of taxable gifts before any gift taxes apply. Taxable gifts are deducted from the unified credit. Upon the death of the taxpayer, the assets remaining in the estate are taxable if they exceed the unified credit remaining after the deduction of all taxable lifetime gifts. The unified credit amount for 2019 is $11.4 million.
Beware of situations that inadvertently result in reportable gifts.
Gifts include more than just cash transfers. If you loan money to someone either interest-free or at a below-market rate, you’ve created a gift. If you forgive debt, that’s a gift. Are you helping support an adult child? If you pay a bill of any kind (with the exception of direct payment of educational and medical payments mentioned above), those amounts need to be included when determining whether your annual gifts have exceeded the per-person annual exclusion. Transfers of property of all kinds are gifts. Remember: when applying the annual exclusion to a recipient’s gifts, you must include ALL gifts whether cash, property or otherwise.
If you or a loved one is living with a chronic illness, such as Parkinson’s, multiple sclerosis or Alzheimer’s, it is important that the necessary persons have their estate planning documents in place and that they address the likely issues which may arise due to the chronic illness.
It has been estimated that about 157 million Americans are living with chronic illnesses, and also that about nine million cancer survivors are living with side effects from their treatment. The percentage of lives impacted by chronic illness grows dramatically with age, and our population continues to grow older. Approximately half of those individuals who are age 85 or older have some cognitive impairment.
Older people, even those who have no chronic illnesses, should have some of the same estate planning documents as younger people, but it is more important for them to have their documents in place because of the likelihood that their health will become more complicated with age. If you (or a loved one) has a chronic illness, it may be necessary to have documents which are personally drafted to serve your specific needs, and to address your challenges.
If you let your chronic illness progress too far, it might impede your ability to understand your legal documents and you may even lose your ability to sign those documents. Consequently, it is best to address your personal issues and to get your legal documents in place, as soon as you can after diagnosis.
We realize that it may be difficult for you or your loved one to do so, as you are likely to be dealing with overwhelming medical issues, as well as the shock (and perhaps depression) from learning about your diagnosis. Your advisors do not necessarily need expertise in dealing with your specific illness, but they must have empathy and a willingness to tailor their usual approaches to meet your specific needs.
The key documents that you might need are the following;
Health Care Power of Attorney.
A Health Care Power of Attorney is a document in which you designate someone to make medical decisions for you, if you are unable to make or communicate those decisions for yourself. The most important decision is to select the proper person and possible successors, in case that person becomes unable to act for you. You may need to coordinate your Health Care Powers of Attorney with your financial Power of Attorney discussed below, because health care and financial decisions are likely to be interrelated.
Financial Power of Attorney.
This document should be a “durable” power of attorney which remains fully effective if you lose your competency. This document designates a trusted person or corporate fiduciary to handle legal, financial and tax matters for you if you are unable to handle those matters for yourself.
A key question to consider is how much control to give out now, if any, and how much control is to be relinquished in the future, if your condition progresses? You should relinquish enough control so that you can be assisted as necessary, but you may prefer not to relinquish any more than you need at any point in time.
Another point to consider is the issue of compensating your agent. Some powers of attorney provide for no compensation, and many family members are willing to act in that manner. However, that may become burdensome if the agent has to act for many years to assist you. If the agent has modest means of his or her own and is required to spend a great deal of time on your behalf, you may want to provide for compensation, even if the agent initially tells you not to provide for it, and/or there could be a creative way to make special provision for the agent in your Will.
Living Will and Advance Directive.
A “living will” or Declaration of Desire to Die a Natural Death expresses your desire not to have your dying process prolonged by extraordinary means if you are terminally and incurably ill, and if you are likely to die in the near future.
If you are living with a chronic illness you might want to modify the general language to disclose your specific condition. If you want to address matters such as experimental treatments and drugs, you may do so. Tissue and organ donations are allowed under a living will, and if you have a chronic illness, you may want to modify that language.
Federal laws have been passed, called the HIPAA laws, to protect the privacy of a patient’s health information. A health care provider is required to keep your health care confidential unless you authorize the disclosure of that information to specific individuals.
If you are not able to give permission to disclose your health care information when admitted to a hospital or other health care facility, you should have a HIPAA Release signed while you are able to do so, authorizing the release of your otherwise-confidential health information to be released to individuals named in the release form. That health information will be essential for the people who are helping you to interact with your health care providers. Even though your health care decision-makers are the only people who can make your heath care decisions, you may prefer, for personal reasons, to name other family member or other loved ones to have access to your health information, too, so that they will be able to talk with your health care providers about your medical condition, even though they may not be the persons making your medical decisions for you.
Revocable Trusts are often used in estate planning to avoid the publicity, cost and difficulties of court probate or administration at one’s death, but if you or a loved one has a chronic illness, a Revocable Trust may provide more control and better continuity during your lifetime than simply using a financial power of attorney. Also, you may be able to incorporate into a Revocable Trust Agreement better safeguards and protections that are typically provided for under a power of attorney.
Although not frequently, we have occasionally had to deal with a trusted individual who abuses his or her authority under a power of attorney, and a trust agreement is a a somewhat better mechanism for monitoring them than a simple power of attorney.
A Power of Attorney is a legal document in which a person (the “Principal”) gives someone else (the “Agent”) the power to act on behalf of the Principal as set forth in the Power of Attorney, perhaps doing things such as writing and signing checks, or even signing deeds or tax returns. Those documents can also include the authority to do many other things, and not just basic functions.
If the Principal becomes incapacitated, the Agent’s authority under an ordinary power of attorney is revoked as a matter of law, but if the Power of Attorney is “Durable,” i.e. it expresses the Principal’s intent that it shall remain in effect if the Principal becomes incapacitated, it will not be revoked if the Principal becomes incompetent.
Until January 1, 2018, North Carolina law required a Durable Power of Attorney to be recorded in the office of the Register of Deeds, but that is no longer a legal requirement for documents executed after that date, except in the case of real estate transactions, in which case powers of attorney must be recorded.
Depending on the language in the document, Durable Powers of Attorney can be effective immediately, even if the Principal is capable of acting for himself or herself, or they can be “springing,” i.e. the Power of Attorney becomes active only upon the occurrence of a future event, such as when the Principal becomes legally incompetent.
The North Carolina General Statutes provide a statutory Short-Form Power of Attorney which may be used, instead of a form listing detailed descriptions of each specific power. If you have an old statutory Short-Form Power of Attorney executed before January 1, 2018, it must be recorded at the Register of Deeds office to be actively used. After January 1, 2018, you should not sign a durable power of attorney which uses the old statutory short-form language, because the laws have been changed.
Both the old and the new Statutory Short-Form Powers of Attorney are limited in the scope of authority granted to the Agent to act on behalf of the Principal and we recommend that you have a longer, more detailed document which grants specific authority to perform certain types of transactions on your behalf, that are not specifically covered in the short-form documents. A document which says something like “I authorize my Agent to do anything which I could do if I were present and acting for myself” does not grant the broad authority for which it seems to be intended, because certain powers must be explicitly specified, in order to be effective. The authority of the Agent to act on behalf of the Principal should be clear and unambiguous.
Example: A lady signed a durable power of attorney a number of years ago. She now suffers from Alzheimer’s and her family wants to do long-term planning, which could include some family gifting. Unfortunately, the old power of attorney does not give her agent the power to make gifts. Also the old power of attorney does not contain the language required by the IRS which would authorize the agent to represent her with the IRS.
Consequently, we recommend that you not rely on the statutory Short-Form Power of Attorney, especially old ones, but even new documents signed after January 1, 2018, on the mistaken assumption that the document will be comprehensive and will cover all of your needs. To the contrary, we recommend that you consult with an attorney and have a power of attorney drafted which meets all your specific needs.