It is Hard to Gift it Away

One of the areas of estate planning that causes the most confusion is gifting. Gifts are transferred from a donor to a done in several ways. Gifting has a huge diversity of answers in how gifting is accomplished.

Here are some basics on gifting. The IRS considers any gift from one person to another a taxable gift. But, there are some exceptions to the rule:

1. Gifts of any property that are not more than the annual exclusion for the calendar year. (Note - the annual exclusion is $13,000 for 2011.)
2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
3. Gifts to your spouse.
4. Gifts to a political organization for its use.

Property gifted may be straight cash, a car, stocks, etc. For non-cash gifts or assets without a ready known value, the gift's value is considered the fair market value. Fair market value is defined at what would the property change hands between a willing buyer and willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

A typical situation of an excluded annual gift is when a parent gifts $13,000 to a child. Married couples can also gift-split meaning each parent can gift to a child $13,000 for a total of $26,000 - $13,000 from each parent. If a child is married, the married couple can each gift the spouses $13,000 for a total gift of $52,000.

If a gift is valued at more than the annual exclusion then it is considered a taxable gift with a safe harbor has shown below. A gift tax is owed. The gift tax is generally the responsibility of the donor. Yes, that's right. The person giving the gift away to another person is socked with paying tax on that gift. The main reason the donor pays the tax is that once the gift is transferred, that asset is no longer in the donor's estate for estate tax purposes. The IRS's assumption, and it is a winning one, is that the gift was done in contemplation of minimizing a person's taxable estate for tax purposes.

In addition to the removal of the gift from a person's estate, there are some added benefits to making a gift in excess of the annual exclusion. In 2011 and 2012, everyone has a five (5) million dollar lifetime exclusion. This means that an annual gift in excess of $13,000 in 2011 will consume a part of that person's lifetime exclusion. For example, Dad gifts $500,000 to Son in January of 2011 to buy a house. The first $13,000 of Dad's gift is not subject to the gift tax because of the exclusion. The remaining $487,000 is a taxable gift. That $487,000 is subtracted from Dad's Lifetime amount leaving $4,513,000 remaining in Dad's Lifetime Exclusion that Dad can still gift away in 2011 and 2012 and, depending on whether the rules change in 2012 or later, possibly beyond 2012.

The Lifetime Exclusion was not always so generous, but that was changed in the Tax Compromise of 2010. From 2001 until the Tax Compromise, there was only a $1 million Lifetime Exclusion. The increase of the Lifetime Exclusion from to $5 million has seen a number of affluent Americans transferring assets to their beneficiaries or creating high level estate planning entities like grantor annuity trusts to reduce their taxable estate.

In the past, another reason people made taxable gifts was that the gift tax rate was lower than the estate tax rate. Currently, the estate tax rate and the gift tax rates are the same.

If there is anything that you can take away from this is that you can gift $13,000 to anyone else. If you exceed the annual exclusion you would consume part of your Lifetime exclusion.

Basics of Estate Planning: GAL - Guardian Ad Litem

A guardian is a person that acts to protect or help someone, called a "ward," that might be incapable of acting for themselves due to some form of incapacity. "Ad Litem" is Latin meaning "for the lawsuit." Thus, a guardian ad litem, or "GAL," acts in the best interests of the ward for a specified period. In short, they act as a quasi-spokesperson for the ward to make sure the ward's rights are protected during litigation.

A GAL typically gets appointed by a judge for a case involving a ward. The ward can be a minor child or a person with a disability that makes it hard for the ward to understand the case in which the ward is involved. A typical situation in which a GAL may become immersed is during elderly-adult guardianship hearings when the elderly adult has some form of dementia or other mental incapacity. A GAL can also become involved in matters related to child custody or neglect or abuses cases. In these matters, a GAL may be appointed to investigate and advocate for the best interest of the child or ward.

A court will task a GAL with a variety of responsibilities. The most important task is for the GAL to tell the court what is in the best interest of the ward. A GAL will accomplish this by doing an independent investigation and talking with the ward, care-givers and other people that come in constant contact with the ward. Many times a GAL is required to file a formal report with the court. However, the court does not have to follow the GAL's recommendations.

A GAL is usually paid through a fund in the jurisdiction. Alternatively, a court might require those involved in the matter to pay for the GAL. A GAL does not necessarily have to be a lawyer. All three local jurisdictions have formal training requirements for those meeting the requirements to be a GAL. A GAL also does not work for court services or child protection, or generally any government agency and many times is a member of the bar.

How is a GAL different than a guardian?

A guardian will have "custody" of the ward. Based on the guardianship orders, a guardian makes a variety of decisions for the ward. A guardian acts very much like a parent for the ward. The guardian will make decisions on living location, paying for care, and determining how a minor ward is brought up, to list a few of the guardian's responsibilities.

A GAL does not have custody of the ward or take care of the ward. The GAL works with the court to determine what is in the ward's best interest in the court case. For example, in a minor custody matter, the GAL will talk with the child, parents, relatives, other care-givers, counselors, teachers, child protection workers (if necessary) and the like to determine which person should have custody of the minor ward. After the custody matter is over, the GAL moves on to another case.

While those involved in the legal world sometime call a guardian ad litem "guardian" for short, it is important if you every get involved in a matter with a GAL to understand that a GAL and guardian are very different.

Estate of the Month: Local Socialite's Inheritance Document Leads to Arrest of Husband

This month, I am getting away from more famous estates and looking at an elder issue that occasionally arises.

I was perusing the paper last month and saw the strange story of the death of a ninety-one year old, local DC socialite, Viola Drath. I guess I was initially pulled in because of how close the spelling of her last name is to the all-time bad guy - Darth Vader. However, I kept reading due to, the sadness of her tale and the similarity to the recent charging of a fifteen year old in the murder of ninety-two year-old a day earlier.

Drath was born in Germany and moved to the United States after marrying her first husband, a U.S. Army Colonel. She was a journalist for German and American newspapers and was a strong proponent of German unification back in the 1980's.

After the death of Drath's first husband, at the age of sixty-nine, she married Albrecht Gero Muth, then a twenty-five year old German living in DC, in 1989.

Unfortunately, this marriage ended in the alleged death of Drath by her husband Muth. Only hours after Drath was found dead in her Georgetown home, Muth approached family members of Drath with a signed document that said he would get as much as $200,000 from her estate if she died. That might seem a little tone deaf given the timing. After examining the document Mtuh gave Drath's relatives, police indicated the signature on the document was forged and charged Muth with Drath's death based on a number of inconsistencies with his story.

Their relationship had faced numerous allegations of physical abuse and many of Drath's friends warned her about Muth. But, friends also acknowledged Drath "couldn't face living alone," after her first husband's death. Drath felt she had things under control with Muth. But, the evidence does not support that position. Drath had attempted to file numerous restraining orders against Muth, but she never completely followed through on implementing the orders.

Numerous friends around Drath also stated that Muth has a strange character even beyond his relationship with Drath. In fact, Yahoo has a fact checking page listing some of his peculiarities, including dressing up and claiming to be an Iraqi Army General and having strong connections to various DC power players. If the allegations are true, this is a very sad story.

I mentioned why I was drawn to the story because of the other alleged homicide of Thelma Steele. At first glance, given the Post's headlines, I thought it was the same story.

How often do the elderly get murdered?

You may be surprised how often! While I was writing this article, a seventy-five year old man was murdered for his life insurance benefits.

The FBI Crime Rates Tables show that there were 296 murders of people over the age of 75 in 2009. Of those 296, 150 were women. I was just surprised by that statistic. Even more interesting, there were 89 offenders over the age of 75 that committed murder.

My take away from this is not an estate planning issue but more of a life issue. Sometimes with age, wisdom does not increase. Not everyone is a good person, even those close at hand, and loneliness is a powerful emotion. The elderly because of physical and mental issues might be even more susceptible to these types of events. Family members need to be aware of their elderly relative's living situation and broach the subject of abuse and concern carefully.