King & Wood, P.A.

Why Everyone Needs an Estate Plan

“Estate planning isn’t just for wealthy individuals with large assets; it’s essential for everyone.”

Estate planning means making plans to manage and distribute assets and caring for loved ones in the event of a person’s death or incapacity. It also involves the creation of legally binding documents to outline a person’s wishes for health care and financial matters. Estate planning ensures your wishes are carried out and is also used as a means to minimizes taxes, as explained in the article “Why Estate Planning Is Important Even If You Don’t Have Assets” from The LA Progressive.

Even if you don’t have significant assets, you still need to make decisions about your health care, which is done as part of an estate plan. Here are the fundamentals to get you started.

Will. This is a legal document with specific instructions regarding how your assets are to be distributed after death and who should be named as a guardian to care for minor children. The will is also used to name a person to serve as executor of your estate to carry out your wishes and manage distribution of assets.

Trust. A trust is a legal entity holding property or other assets on behalf of another person, known as the beneficiary. There are many different types of trusts, including revocable, irrevocable and charitable trusts.

The revocable trust allows you to maintain control over assets in the trust during your lifetime. After death, the assets in the trust are distributed according to the terms in the trust. An irrevocable trust can’t be changed or amended once it’s established. Charitable trusts are used to provide for a nonprofit organization.

Trusts are used to manage and distribute assets during a person’s lifetime and after their death. They are also used to remove assets from the taxable estate and can also be used to manage expenses associated with the distribution of one’s estate.

Healthcare Power of Attorney. This document allows you to name someone to make medical decisions on your behalf if you are incapacitated and can’t make decisions for yourself. These should be created with your personal situation in mind; a standard form may not permit the nuances you want to convey to another person. With a customized healthcare POA, you can specify the type of decisions your healthcare agent may make and describe any limitations you want over their authority.

Financial Power of Attorney. The financial POA allows you to name a person, called your “agent” or “attorney in fact,” to manage finances if you are too sick or injured to do so. This should also be a customized document, as you may want to limit your agent’s authority to pay bills or allow them to do everything from paying bills to managing investment accounts. The POA expires upon your death and the agent can’t perform any tasks once you have passed away.

Without an estate plan, the care of minor children and distribution of assets takes place according to state laws, which isn’t how most people want their decisions made. The solution is actually quite easy: talk with a local estate planning attorney and get started on creating your estate plan.

Reference: LA Progressive (Jan. 11, 2023) “Why Estate Planning Is Important Even If You Don’t Have Assets”

Why You Need a Secondary Beneficiary

“Naming secondary beneficiaries can help estate planners avoid the delay and costs of going through probate, as well as ensure that your wishes are carried out.”

A secondary beneficiary, sometimes called a contingent beneficiary, is a person or entity entitled to receive assets from an estate or trust after the estate owner’s death, if the primary beneficiary is unable or unwilling to accept the assets. Secondary beneficiaries can be relatives or other people, but they can also be trusts, charities or other organizations, as explained in the recent article titled “What You Need to Know About Secondary or Contingent Beneficiaries” from yahoo! life.

An estate planning lawyer can help you decide whether you need a secondary beneficiary for your estate plan or for any trusts you create. Chances are, you do.

Beneficiaries are commonly named in wills and trust documents. They are also used in life insurance policies and in retirement accounts. After the account owner dies, the assets are distributed to beneficiaries as described in the legal documents.

The primary beneficiary is a person or entity with the first claim to assets. However, there are times when the primary beneficiary does not accept the assets, can’t be located, or has predeceased the estate owner.

A secondary beneficiary will receive the assets in this situation. They are also referred to as the “remainderman.”

In many cases, more than one contingent beneficiary is named. Multiple secondary beneficiaries might be entitled to receive a certain percentage of the value of the entire estate. More than one secondary beneficiary may also be directed to receive a portion of an individual asset, such as a family home.

Estate planning attorneys may even name an additional set of beneficiaries, usually referred to as tertiary beneficiaries. They receive assets if the secondary beneficiaries are not available or unwilling to accept the assets. In some cases, estate planning attorneys name a remote contingent beneficiary who will only become involved if all of the primary, secondary and other beneficiaries can’t or won’t accept assets.

For example, a person may specify their spouse as the primary beneficiary and children as secondary beneficiaries. A more remote relative, like a cousin, might be named as a tertiary beneficiary, while a charity could be named as a remote contingent beneficiary.

Almost any asset can be bequeathed by naming beneficiaries. This includes assets like real estate (in some states), IRAs and other retirement accounts, life insurance proceeds, annuities, securities, cash and other assets. Secondary and other types of beneficiaries can also be designated to receive personal property including vehicles, jewelry and family heirlooms.

Naming a secondary beneficiary ensures that your wishes as expressed in your will are going to be carried out even if the primary beneficiary cannot or does not wish to accept the inheritance. Lacking a secondary beneficiary, the estate assets will have to go through the probate process. Depending on the state’s laws, having a secondary beneficiary avoids having the estate distribution governed by intestate succession. Assets could go to someone who you don’t want to inherit them!

Talk with your estate planning attorney about naming secondary, tertiary and remote beneficiaries.

Reference: yahoo! life (Jan. 4, 2023) “What You Need to Know About Secondary or Contingent Beneficiaries”

What Should Not Be Kept in a Safe Deposit Box?

“Locking away certain valuables and important documents in a bank vault could turn into a headache for you or your heirs.”

In today’s digital world, almost everything of importance is stored virtually, in the cloud. A physical safe deposit box might seem like a throwback, but still has some good uses, says a recent article from Kiplinger, “Things You’ll Regret Keeping in a Safe Deposit Box.”

Some things belonging in a safe deposit box include prized possessions, like a valued baseball card collection or jewelry inherited from a loved one. Some important documents—but not all—should be kept in a safe deposit box.

There are many items you may regret putting in a safe deposit box, particularly if you need to access them in an emergency, when the bank isn’t open. The bank may also not be open during emergencies, including natural disasters. The COVID lockdown reduced many bank branch hours, or banks required appointments to access safe deposit boxes.

Here are some things that don’t belong in your safe deposit box:

Cash. If you need cash in an emergency and the bank is closed, you’ll have to wait. Idle money also loses buying power over time when inflation is high. A better place for the money if you don’t need it: an interest-bearing account or a certificate of deposit. Many banks also forbid storing cash in a safe deposit box. The cash has no protection from the Federal Deposit Insurance Corporation (FDIC), which insures up to $250,000 per deposit per bank. However, it is only if your money is in a checking account, savings account, or certificate of deposit.

Passport. Unless you travel internationally frequently, you probably don’t use your passport often. However, what if you score a great deal on a trip with a Monday departure—and the bank is closed until Monday morning? Or a college student on a semester abroad has an emergency and you need to jump on a plane? It’s best to have a passport at home in a secure, waterproof and fireproof safe.

Your will and other estate planning documents. Keeping copies of your will, your spouse’s will and any will in which you’re named the executor in a safe deposit box makes good sense. However, your original will does not belong there, especially if you are the sole owner of the safe deposit box. After your death, the bank will seal the safe deposit box until the executor can prove they have the legal right to access it. Settling your estate will be delayed until this is resolved.

Keep the original copy of your will either with your estate planning attorney, if they provide the service, or keep it where your executor or spouse can easily access it. Copies are fine in the safe deposit box. However, originals need to be accessible.

Final letters of instruction. Writing a letter of instruction to go along with your estate plan is smart. The letter can convey your wishes for medical care, if want to be buried or cremated and what kind of memorial service you want. However, if the letter is sealed up in a safe deposit box, your wishes will never be granted. Keep a letter of instruction with your original will and consider sending dated copies of the letter to anyone who you want to take action on your behalf or who is designed to receive a specific bequest.

Powers of Attorney. A POA gives authority to a third party to act on your behalf should you become incapacitated. If it’s locked in a safe deposit box and only you have access to the box, the person you want to protect you when you are incapacitated will not be able to help. Keep the original POA with the original copy of your will. Copies are fine for anyone who will need them. However, the original stays with your will.

Advance Directives. Much like the POA, your advance directives—living will and health care proxy—will be needed if you become seriously ill or injured or incapacitated. Without quick access to these advance directives, no one will know your wishes. Make sure that medical providers and family members have copies on hand.

Reference: Kiplinger (Jan. 4, 2023) “Things You’ll Regret Keeping in a Safe Deposit Box”

What Happens When There Is No Will?

“Creating a will should be the first step in a comprehensive estate planning process, since it allows you to make sure that your wishes are properly carried out after your death.”

A will ensures that your personal and financial assets are given to the people and organizations you want. It also allows you to choose the person you want to settle your affairs, known as your executor. The time to have a will prepared is typically the same time people have a power of attorney and healthcare proxy forms prepared, according to the article “What Happens if You Die Without a Will?” from The Street.

Your estate plan is the term used to describe having all of these and other tools prepared to work together. It has nothing to do with the size of your estate, which could be modest or major. Regardless of the financial size or complexity of your life, you need a will.

What happens without a will?

A married person with children who dies without a will does the family a great disservice. All property, including real estate, investments and accounts that are jointly owned with the spouse go to the co-owner without needing to go through probate. However, separately owned property and accounts are distributed by the state in the absence of a will. Depending on the state, one-third may be awarded to the surviving spouse, and the remainder may be divided among the children. If the children are minors, the funds will be held in an account only accessible with court approval. The family may find itself without sufficient funds to maintain its lifestyle.

A person who is married but has no children or grandchildren and dies without a will may have their entire estate given to the surviving spouse. However, some states have a cap of $100,000. Other states give a third of to one-half of assets to the surviving spouse and the rest to the deceased’s parents, if they are living, or to the siblings. Jointly owned property, accounts and community property go to the surviving spouse.

What about a single person with children? With no will, the state law gives the decedent’s assets to surviving children in equal shares. If an adult child is deceased, their share is split among their own children (the decedent’s grandchildren). However, if the children are minors, the money is subject to court control and supervision.

If someone who is single and has no children dies, the state usually gives their assets to surviving parents. If the parents are not living, the assets will be distributed to the decedent’s siblings, or nephews and nieces, if the siblings have also passed. The state will reference a consanguinity chart—a chart used to help identify relationships of people showing degrees of family relationships by blood or marriage. Assets may pass to distant cousins who have never met or even known of the existence of the decedent.

If there are no living family members, the estate typically goes to the state itself.

When a member of an unmarried couple dies without a will, the surviving partner has no legal rights at all. Only spouses and relatives are recognized by state law. The partner will not inherit anything; assets will pass as if the person was single.

Domestic partners are treated differently in different states. In some states, they have inheritance rights, but this is state-dependent.

An experienced estate planning attorney can create a will and related documents to ensure your wishes are carried out upon your death. Otherwise, your estate will be distributed according to the laws of your state. You can protect yourself and your loved ones with a will.

Reference: The Street (Jan. 2, 2023) “What Happens if You Die Without a Will?”

When Can Gifts or Donations Be Made for You?

“Many older adults enjoy giving money during their lifetime to family members or donations to a religious or charitable organizations.”

Grandparents may make a generous gift to a grandchild to help with college expenses or an adult child who is struggling. The size of the gifts is often directly related to the giver’s financial resources, life circumstances and their relationship with the recipient. However, this tendency toward generosity can come to a sudden stop if the giver becomes incapacitated, explains a recent article titled “Estate Planning: Gifts and donations by agents and trustees” from Lake County News.

Authority to make gifts can be included in a person’s trust to permit the trustee to make gifts using assets owned by the trust. A person’s power of attorney can be drafted to permit the agent to gift using assets owned by the individual if this gifting authority is expressly stated and authorized. It may not be implied based on a person’s past behavior or informal comments.

For example, a commonly used express giving provision in power of attorney is language like this: “The Agent is authorized to make gifts on the Principal’s behalf to the Principal’s children, any of their issue, or both, to the full extent of the federal annual gift tax exclusion…and for such purposes, to remove the Principal’s assets from any revocable trust of which the Principal is a grantor.”

This language, which must be created in alignment with state law, is an example of how the agent may be given discretion to make gifts to children and grandchildren, up to the annual federal gift tax exclusion per person. The agent may request assets from the principal’s trust to fulfill these gifts.

Giving should not be confused with a person’s legal duties of support to a spouse or dependent minor children. A Power of Attorney and a trust can be used to meet a person’s legal duty of support during the time of their incapacity.

Some people provide financial support to family members, which is not required by law.

For example, a parent may wish to pay a disabled child’s living expenses in coordination with any special needs planning. It’s extremely important in this situation for planning to be in place long before it is needed. If support is to continue when the parent becomes incapacitated, the parent’s estate planning documents must provide for continued support, otherwise the child will lose access to those resources.

An agent under a power of attorney and a trustee according to the directions of the trust document are both fiduciaries, meaning they are legal representatives with duties and obligations to put the interest of the individual ahead of their own.

Any action taken by the agent or the trustee must meet the standard of the fiduciary. The actions must be reasonable, in good faith and consistent with any instructions specified in the document. An agent or a trustee may not make imprudent or unjustified gifts which might jeopardize the financial welfare of the principal.

An important exception is if the agent or trustee is expressly authorized to gift assets in order to qualify the principal as eligible for needs-based government benefits.

There are many good reasons to make gifts during one’s lifetime. It is sometimess necessary for those gifts to continue during incapacity. Talk with an estate planning attorney to ensure that loved ones are protected regardless of what unexpected events should occur.

Reference: Lake County News (Dec. 31, 2022) “Estate Planning: Gifts and donations by agents and trustees”

How to Plan a Business Succession

“A frequent complaint by next-generation members is that the senior generation never fully lets go of business tasks.”

Winter is a slower season for farmers and ranchers. It offers family business leaders time to plan for the future. A recent article from Progressive Farmer, “Family Business Matters: Eight Practical Succession Ideas,” lists ideas to improve succession and estate planning efforts.

Update balance sheets. Families who own land passed through generations don’t always like to show the land at its current fair market value. Even if you intend to never sell the land, creating an estate plan requires an accurate valuation of all assets to minimize the consequences of estate and income taxes.

Chart ownership for the future. Family members often have no understanding of how they will achieve ownership of the business and its assets. Will it be a gift? Will there be taxes to pay? Or will it be a sale? Will they need to buy out non-farming family members? Without clear answers to these and related questions, people may find themselves operating on assumptions, which almost always leads to conflict or family fractures.

Start handing off management tasks sooner, not later. Plan for the transition by starting with discrete business functions. This could be as straightforward as making decisions about equipment, purchasing crop insurance, or enrolling in a Farm Service Agency. This gives the senior generation the ability to delegate and observe, while empowering and more fully engaging the next generation.

Refresh estate planning documents. People often neglect to update estate documents. Review wills, trusts, trustees, beneficiary designations, advance medical directives and power of attorney documents. Are the people named in various roles still appropriate? Does your estate still work, in light of changing tax laws? This should happen at least every three to five years.

Assess tax consequences of exiting the business. Part of retirement funding is the tax liability of leaving the family business. Deferred income, prepaid expenses and fully depreciated equipment can lead to significant tax exposure. Three to five years ahead of your departure, start mapping out a plan with your accountant, estate planning attorney and financial advisor.

Create a relationship between family members and landowners. If you rent property from an absentee landowner, those relationships will be vital to continuing the business. You may not be able to influence the landowner at the time of transition to the next generation. However, establishing relationships with family members who will take over for you can reduce friction.

Communicate the benefits family members will get from working together to maintain the business. Passing land from one generation to the next often means siblings or cousins become business partners, with undivided interests in the land or as shareholders or members of some legal entity. Family members who may not get along will benefit from having a “buy-sell agreement” in place. This spells out how partners can buy out each other’s interest if one or more family members want to sell. Talk with your estate planning attorney to establish an agreement in advance of anyone leaving the business to reduce the potential of family conflict.

Reference: Progressive Farmer (Jan. 1, 2023) “Family Business Matters: Eight Practical Succession Ideas”

 

 

 

These Celebrities Didn’t have Wills…But You Should

“When the rapper Coolio died in September, he joined a group of notables that includes Prince, Howard Hughes and Pablo Picasso—all of whom died without specifying who should inherit their money and estate.”

Rapper Coolio died at age 59 after being found unresponsive on the floor at a friend’s house. His real name was Artis Leon Ivey Jr., and his former manager, Jared Posey, recently filed a probate case to appraise the value of his estate, according to a recent article “What Coolio, Prince and Picasso didn’t have that you should” from MarketWatch.

The filing names Coolio’s seven adult children, who are reported to wear his ashes in necklaces, as his next of kin and likely beneficiaries of his estate. There are also three other children who are under legal age.

The estimated value of the estate is more than $300,000, including personal property, demand deposit accounts, financial accounts, insurance policies and royalties.

Coolio is far from alone in failing to have a will. A 2021 Gallup poll revealed that fewer than half adults in the U.S. have a will outlining how they want their estate to be handed upon their death. It’s a recipe for disaster for their families.

Dying without a will—known as dying intestate—means a local probate court has to decide how to distribute property according to state law, which can take months or even years. What finally occurs may not be what you intended. However, it will be too late.

A will is only one of many tools in the estate planning toolbox. You also need an updated Medical Power of Attorney, a Financial Power of Attorney and to have beneficiary designations on all of your accounts. The beneficiary designations override your will, which is often news to loved ones.

If you have a beneficiary listed on your 401(k) plan, the person listed will receive the assets in the 401(k), regardless of what is in your will. You want to make sure beneficiaries and secondary beneficiaries are all up to date on all of your accounts.

Another important consideration: if a spouse is cut out of a will who would normally receive an inheritance, they have legal standing to challenge the will in court.

For a complete estate plan, you need a Durable Power of Attorney, which states who can make financial decisions on your behalf if you are incapacitated. A Medical Power of Attorney names a person to make medical decisions for you if you are unable to make them yourself, and guardianship designations if you have minor children.

Every few years or after any big life changes, these documents, including beneficiary designations, need to be reviewed and updated with your estate planning attorney.

Other accounts, like brokerage accounts or bank accounts, may have “Pay on Death” or “Transfer on Death” designations which would immediately put the assets into the named person’s hands upon your death.

Another item to consider is a letter of intent, in which you describe for the executor of your estate your final wishes regarding burial or funeral. This document is not legally binding but can be used to share your wishes. The will may not be reviewed until after the funeral, so final directions for funerals, cremations, memorial services, etc., should not be in the will.

You can create a list to be appended to your will listing who will receive certain tangible items, like the family silver or your mother’s pearls. One good thing about having such a list is that it gives you an opportunity to update beneficiaries of your tangible personal property without needing to update your will itself. Be sure the list doesn’t contradict anything in your will and describe the items with great detail. You might also want to include contact information, so your executor can easily locate the person and make sure the items find their desired home.

Better yet—give the items away before you die. You won’t have to worry if they won’t get to the right person, and you’ll get to share the person’s enjoyment when they receive the gifts.

Reference: MarketWatch (Dec. 31, 2022) “What Coolio, Prince and Picasso didn’t have that you should”

Some Expenses are Paid by Estate and Some by Beneficiary

“If you’re set to inherit, you may be wondering what estate expenses are paid by the beneficiary. The answer can depend on what assets are passed on to you when a family member or loved one passes away.”

Settling an estate can be complex and time-consuming—it all depends on how much “estate planning” was done. According to a recent article from yahoo! Finance titled “What Expenses Are Paid by the Estate vs. Beneficiary?,” the executor is the person who creates an inventory of assets, determines which expenses need to be paid and distributes the remainder of the estate to the deceased’s beneficiaries. How does the executor know which monies are paid by the estate and which by the beneficiaries?

First, let’s establish what kind of expenses an estate pays. The main expenses of an estate include:

Outstanding debts. The executor has to notify creditors of the decedent’s death and the creditors then may make a claim against the estate. Because a person dies doesn’t mean their debts disappear—they become the debts of the estate.

Taxes. There are many different taxes to be paid when a person dies, including estate, inheritance and income tax. The federal estate tax is not an issue, unless the estate value exceed the exemption limit of $12.92 million for 2023. Not all states have inheritance taxes, so check with a local estate planning attorney to learn if the beneficiaries will need to pay this tax. If the decedent has an outstanding property tax bill for real estate property, the estate will need to pay it to avoid a lien being placed on the property.

Fees. There are court fees to file documents including a will to start the probate process, to serve notice to creditors or record transfer of property with the local register of deeds. The executor is also entitled to collect a fee for their services.

Maintaining real estate property. If the estate includes real estate, it is likely there will be expenses for maintenance and upkeep until the property is either distributed to heirs or sold. There may also be costs involved in transporting property to heirs.

Final expenses. Unless the person has pre-paid for all of their funeral, burial, cremation, or internment costs, these are considered part of estate expenses. They are often paid out of the death benefit associated with the deceased person’s life insurance policy.

What expenses does the estate pay?

The estate pays outstanding debts, including credit cards, medical bills, or liens.

• Appraisals needed to establish values of estate assets
• Repairs or maintenance for real estate
• Fees paid to professionals associated with settling the estate, including executor, estate planning attorney, accountant, or real estate agent
• Taxes, including income tax, estate tax and property tax
• Fees to obtain copies of death certificates

The executor must keep detailed records of any expenses paid out of estate assets. The executor is the only person entitled by law to see the decedent’s financial records. However, beneficiaries have the right to review financial estate account records.

What does the beneficiary pay?

This depends on how the estate was structured and if any special provisions are included in the person’s will or trust. Generally, expect to pay:

• Final expenses not covered by the estate
• Personal travel expenses
• Legal expenses, if you decide to contest the will
• Property maintenance or transportation costs not covered by the estate

Some of the expenses are deductible, and the executor must use IRS Form 1041 on any estate earning more than $600 in income or which has a nonresident alien as a beneficiary.

An estate planning attorney is needed to create a comprehensive estate plan addressing these and other issues in advance. If little or no planning was done before the decedent’s death, an estate planning attorney will also be an important resource in navigating through the estate’s settlement.

Reference: yahoo! finance (Dec. 29, 2022) “What Expenses Are Paid by the Estate vs. Beneficiary?”

What Happens When Property Is Owned Jointly and an Owner Dies?

“Various types of property, such as bank accounts and real estate, can be owned jointly with another person(s).”

When property is owned jointly, the property may pass automatically to the other owner, passing without going through probate, according to a recent article titled “Everything you need to know about jointly owned property and wills” from TBR News Media

Your will only concerns assets in your name alone without a designated beneficiary. Let’s say you have a joint checking account with another person. On your death, the account automatically becomes the property of the surviving owner. This is outside of probate, and any directions in your will won’t apply.

Real estate is most commonly owned jointly, in several different ways and each with its own set of laws.

Joint Tenancy or Joint Tenancy with Rights of Survivorship. On the death of a joint owner, the owner’s share goes to the surviving joint owner. Simple. The main advantage is the avoidance of probate, which can be costly and take months to complete.

Tenancy by the Entirety. This type of joint ownership is only available between spouses and is not used in all states. A local estate planning attorney will be able to tell you if you have this option. As with Joint Tenancy, when the first spouse passes, their interest automatically passes to the surviving spouse outside of probate.

There are additional protections in Tenancy by the Entirety making it an attractive means of ownership. One spouse may not mortgage or sell the property without the consent of the other spouse, and the creditor of one spouse can’t place a lien or enforce a judgment against property held as tenants by the entirety.

Tenancy in Common. This form of ownership has no right of survivorship and each owner’s share of the property passes to their chosen beneficiary upon the owner’s death. Tenants in Common may have unequal interests in the property, and when one owner dies, their beneficiaries will inherit their share and become co-owners with other Tenants.

The Tenant in Common share passes the persons designated according to their will, assuming they have one. This means the decedent’s executor must “probate” the will and file a petition with the court. However, a Tenant in Common may be able to avoid probate if their share of the property is held in trust, in which case the terms of the trust and not their will controls how the property passes at death. In this case, there’s no need for any court involvement.

There may be capital gains consequences when transferring ownership interests during and after life. Such gifts should never be made without speaking with an estate planning attorney. One of the more common errors occurs when the testator fails to account for the different types of ownership and how assets pass through the will. A comprehensive estate plan, created by an experienced estate planning attorney, ensures that both probate and non-probate assets work together.

Reference: TBR News Media (Dec. 27, 2022) “Everything you need to know about jointly owned property and wills”

How Do I Reduce Size of My Taxable Estate?

“Today’s high estate and gift tax exemptions could be slashed in a few years. Maximize those and other benefits now.”

The current lifetime estate and gift tax exemption is set to be cut by half after 2025, unless Congress acts to extend it, which doesn’t seem likely in the current financial environment. There are steps to minimizing not only estate and gift taxes, but also income and capital gains taxes, as reported in a recent article “Smarter Ways To Make Estate Planning Gifts” from Forbes.

It’s generally better to give property than to give cash, especially investment property. Recipients are less likely to sell these gifts and spend the proceeds. It’s more likely that cash will be spent rather than invested for the long term. Investment property is almost always a better gift for the long term.

However, property gifts come with potential taxes. To minimize the after-tax wealth, make gifts of the correct properties. There are a few principals to follow.

Don’t give investment property with paper losses. The recipient of a gift of property gets the same tax basis in the property as the person making the gift. The appreciation occurring during the holding period is taxed when the gift recipient sells the property.

If the property didn’t appreciate when the owner had it, the beneficiary’s tax basis will be the lower of the owner’s basis and the current market value. When the investment lost value, the beneficiary reduces the basis to the current fair market value. The loss incurred for the owner won’t be deductible by anyone. There is no winner here. It is best for the owner to hold the loss property or sell it, so at least they can deduct the loss and gift the after-tax proceeds.

Give appreciated investment property after a price decline. This makes maximum use of the annual gift tax exclusion and minimizes the use of the giver’s lifetime estate and gift tax exemption. You can give more shares of a stock or mutual fund by making the gift when prices are lower.

Let’s say shares of a mutual fund were at $60—you could give 266.67 shares tax free under the annual gift tax exclusion ($17,000 in 2023). If the price dropped to $50, you could give 320 shares without exceeding the exclusion limit.

When the recipient holds the shares and the price recovers, they will have received more long-term wealth. The giver would not have incurred estate and gift taxes or used part of their lifetime exemption.

This is also an example of why families should consider gift giving throughout the year and not just at year’s end. An even better way: determine early in the year how much you intend to give, and then look for a good time during the year to maximize the tax-free value of the gift.

It’s good to give property most likely to appreciate in value. If the goal is to remove future appreciation from the estate, gift property you expect to appreciate. This also serves to maximize the wealth of loved ones, especially appreciated when the beneficiary is in a lower tax bracket. When the property is eventually sold, the beneficiary likely will pay capital gains taxes on the appreciation at a lower rate than the giver would. You pass on more after-tax wealth and reduce the family’s overall taxes.

Retain property if it has appreciated significantly. When it’s time to sell the property and the loved one is in the 0% capital gains tax bracket, it’s best to make a gift of the property and let them sell it. Even if the loved one is in the 10% capital gains tax bracket, this still make sense if you’re in the higher capital gains tax bracket. But there are some things to consider. If the gain pushes the recipient into a higher tax bracket and triggers higher taxes on all their income, it won’t be a welcome gift. If there’s no urgent need to sell the property, you can ensure a 0% capital gain by simply holding onto the investment.

Give income-generating assets. If you hold income-generating investments and you don’t need the income, consider giving those to family members in a lower tax bracket. This reduces taxes on the income and the recipient is also less likely to sell the asset to raise cash when it’s generating income.

Remember the Kiddie Tax. Heirs who are age 19 or under (or under 24 if they are full-time college students) are hit with their parents’ highest tax rate on investment income they earn above a certain amount, which was $2,300 in 2022. At this point, gifts of income-producing property create tax liabilities, not benefits.

Reference: Forbes (Dec. 27, 2022) “Smarter Ways To Make Estate Planning Gifts”