The Season of Giving

The end of another year is upon us.  As with each year, this year ends with the holiday of giving, Christmas, and so our minds turn to gifting.  The most common questions that people have when it comes to gifting is: How much can I gift before I have to pay tax? And, how much can someone receive before they have to pay tax?  Much to most people’s surprise, few gifts would ever result in the giver of the gift paying gift tax, and the recipient of the gift never pays gift tax.

I have written numerous times about gifting and gift tax.  I can’t tell you how many people come to see me and tell me that they cut out my articles and have been saving my articles for years.  People tell me that they have hundreds of my articles saved.

Of course, I am flattered by this fact, and it affirms for me my initial thoughts for writing these articles. If I simply ran an ad saying “I’m great.  Come to me!,” I’d be no different than any other advertiser.  But by giving people information, I introduce myself to them, letting them know what services I provide, and I provide them with information.  I also let them know what I know about my practice area.

But I can tell you that no matter how many articles I write about gifting and gift tax, I will never get the message of truth about these issues to the masses. Most every person who comes to see me tells me their belief that they can only gift $15,000 (or some figure, which ranges anywhere from $10,000 to $15,000) a year without paying gift tax.  Oddly, though, people rarely understand when a gift occurs.  For instance, a person will tell me that they can only gift $15,000 a year, then they’ll tell me that they gave their house to the children.

A gift occurs anytime you give something of value away and do not receive that thing’s value. For instance, if I write you a check for $15,000, and you give me nothing, then I have made a gift of $15,000.  If I transfer my house to you and my house is worth $400,000, then I have made a gift of $400,000.  If I give you my house worth $400,000, and you give me $200,000, then I have made a gift of $200,000.

When people talk about gift tax, they are talking about federal gift tax. There is no New Jersey gift tax.  For federal gift tax, there is an amount that a person can give away each year to an unlimited number of people.  This exclusion from the gift tax is called the “annual exclusion.”  The current annual exclusion gift is $15,000.  This is where people get the “I can only give $15,000 a year without paying gift tax” rule from; however, this is only half of the rule.

Each person receives a credit equivalent against gift tax of $11,200,000.  What this means is, you would have to give away, at least, $11,200,000 before you would ever pay gift tax.  Because of the annual exclusion, a person can give away $15,000 a year to an unlimited number of people without reducing his $11,200,000 lifetime credit.

For example, if I gave away $15,000 to 1,000 people, then I would not reduce my $11,200,000 lifetime credit at all. If I give away $16,000 to the 1,001st person, then my lifetime credit against gift tax will be reduced from $11,200,000 to $11,199,000.

So, unless you are worth more than $11,200,000 (and that would certainly only be the top 1% of our society), then you have no chance of ever paying gift tax. You simply do not have enough money to ever pay gift tax.

On the other hand, gifts can cause issues for Medicaid eligibility. Any gift that you make will count against your eligibility for Medicaid for five years following the gift, but that is a discussion for another day.  The lesson of today’s article is, don’t let gift tax get in the way of your giving.

Debts of the Estate

Being an executor of a decedent’s estate can be daunting and intimidating.  As an executor, you are handling the affairs of someone else (the person who has passed away) for the benefit of other people (the people who are inheriting the decedent’s property, that is, the beneficiaries of the estate).

Most people who are charged with the role and responsibility of being an executor want to do a good job. They want to do things correctly.

A big part of being an executor is ensuring that all the debts of the decedent are paid. Some estates have insufficient assets to pay all the debts of the decedent.  These estates are said to be insolvent, because the assets of the estate are insufficient to pay the debts of the estate.

Ironically, I find that insolvent estates, which typically have few assets, are some of the more difficult estates to administer. You would think, for instance, that an estate worth only $30,000 wouldn’t be that hard to administer, but if the decedent had $120,000 in debts and only $30,000 in assets, the administration of the estate can get sort of tricky.

There is a procedure to be followed in these instances, and the debts of the estate are given a priority as to their payment given the nature of the debt. In order to properly administer an insolvent estate, I would say that the retention of the services of an attorney are a must because a court action must be filed on behalf of the estate in order to declare the estate insolvent and have a debt payment plan approved.

But even with solvent estates, the payment of creditors can get tricky. There are odd legal phrases that when the layperson hears them, I am confident he thinks they mean something other than what they truly mean.

For instance, if you were told that creditors of the estate have nine months from the date of the decedent’s death to present their claim (or debt) and if they don’t present their claim within that nine-month period of time their claim will be barred, you would think that if, for instance, Doctor Smith doesn’t send his medical bill to the executor within nine months of the decedent’s death, then Doc Smith isn’t being paid, ever. But this is incorrect.

Creditors have nine months to present their claims to the executor following the decedent’s death. Most creditors of an estate are “contract creditors,” creditors who performed some service to the decedent pursuant to a verbal or written contract.  For instance, a medical debt would be a debt based in contract law.

A contract creditor typically has six years from the date the services were provided to sue. All the nine-month limitation period is saying is this:  If the executor waits nine months following death before make distributions of the estate to the beneficiaries, then the creditor (Doctor Smith) cannot sue the executor for making a premature distribution of the estate.  Doctor Smith could still sue on his debt if the debt isn’t paid, but if the executor waited nine months, then Doctor Smith cannot sue the executor personally for administering the estate improperly.

Of course, if the executor distributed the money to the beneficiaries, who is Doctor Smith going to sue? The estate now has no money.

If the executor did things correctly, then the executor would have taken “release and refunding bonds” from each of the beneficiaries. A refunding bond is a document that each beneficiary signs that says, in essence, if a debt of the estate is presented, I will refund to you, the executor, my proportionate share of the debt based upon the proportion by which my share of the estate relates to the debt.

So, if here are four beneficiaries each receiving an equal share of the estate and Doctor Smith’s bill is $1,000, then each beneficiary must refund $250 to the executor to pay his share of the debt. If the beneficiaries do not do this, then Doctor Smith could sue each beneficiary on the refunding bond, essentially enforcing the agreement each beneficiary entered with the executor.