Gifts

Giving a gift is the easiest thing in the world to do. It can be as simple as placing a check or cash in a card or wrapping a present for a special occasion. From an attorney's standpoint, however, giving a gift has some very specific ramifications. The purpose of this webpage is to discuss how the law views giving gifts, discuss the conditions under which a gift could be voidable, and discuss the Medicaid and Estate planning ramifications of giving gifts. WHAT IS A GIFT? When any of us think of a gift, we think of a package wrapped with a bow. When the law defines a gift, it looks at the actions of the person giving the gift and the actions of the person receiving the gift. THE GIVER The law looks at the giver of the gift to make sure that he was competent when the gift was given. That means he was able to handle his own affairs. In the context of giving a gift, it means that he understood that, once the gift was made, he would lose control of the property he was giving away. The law also looks at the giver to make sure he is not so frail or confused that he might be more dependent upon others than the average person. If a person is more dependent on others, he is more susceptible to undue influence. THE RECIPIENT The Court also looks at the recipient of the gift. First, the recipient must show, by his actions, that he intends to accept the gift. You cannot force someone to accept a gift. Even if the recipient has accepted the gift, in certain situations a Court will look very carefully at the recipient to make sure that the recipient is not the type of person who could exercise undue influence over the giver of the gift. THE IMPROVIDENT GIFT DOCTRINE The Improvident Gift Doctrine was created to protect individuals from their own generosity. It is based on a public policy of preventing individuals from impoverishing themselves, unless they fully understand exactly what they are doing. The doctrine was created in a case involving a wealthy heiress who was wined and dined by a university that sought donation of virtually all of her assets. After several years of entertaining the elderly woman, the woman acquiesced and transferred a substantial portion of her assets to the university. Later, the woman's family learned of the gift and brought a legal action to void it. The New Jersey Supreme Court decided to void the gift. In doing that, the Court decided that it would presume that the university exercised undue influence over the woman, who was elderly and frail, since officials of the university looked to win her trust, and then used that trust to urge her to give the gift. Accordingly, whenever an elderly or frail individual gives all or virtually all of their assets to someone who they trust or who dominates them, the Courts will assume that the gift is voidable. The recipient of the gift then must show that the giver knew exactly what they were doing to prove the gift was valid. This is difficult to show when the giver is confused, or when the gift makes no sense, and when the giver does not have independent legal advice. GIFTS ON BEHALF OF ANOTHER Any discussion of gifts would not be complete without these words of caution. Someone who holds a Power of Attorney for another should never give gifts to himself unless those gifts are specifically authorized by the Power of Attorney document. Giving gifts to oneself under a Power of Attorney that does not specifically authorize gifts breaches your fiduciary duty and those gifts are automatically voidable. Similarly, someone who acts as a Guardian or Conservator cannot give gifts to themselves or to anyone else from their ward's or conservatee’s funds without Court approval. Whenever one handles the funds of someone else, they should be very careful about giving gifts. THE EXEMPTION EQUIVALENT (OR UNIFIED CREDIT) Giving a gift also affects your Will and Estate Planning scheme. First, if affects your Will in a very obvious way because if you give something away, you cannot leave it to someone upon your death in your Will.   It affects Estate Planning in a more subtle way, as well, through the Federal Exemption Equivalent. The Federal Government gives each taxpayer a $1.5 million credit for Federal Estate Taxes and $ 1 million for Gift taxes. You can give assets worth $1 million to others before you die, or you can give others $1.5 million in your Will after your death without incurring Federal gift or estate taxes. The estate tax $1.5 million exemption equivalent is set to increase gradually until 2010. $11,000 EXCLUSION Each year, every individual has an exclusion for up to $11,000 of gifts to each recipient. For a couple, the exclusion is a total of' $22,000 of gifts given to each recipient. Therefore, if a couple gave $22,000 to their son, his wife, and each of their three grandchildren, they could give away $110,000 ($22,000 x 5) without incurring any gift taxes. This means the giver would not use any of his $1 million Exemption from Gift Taxes. Use of this $11,000 gift tax exclusion is, therefore, a very powerful estate planning tool, but this tool must be used carefully. The exclusion is only available for a "present interest" in property. That means, for example, if you signed over your fully paid insurance policy worth $11,000 to your child, the exclusion would not apply and your Exemption Equivalent would be reduced by $11,000. The $11,000 exclusion for gift taxes is not available to gifts of insurance policies because the Internal Revenue Service looks at a life insurance policy as a future interest and not a present interest. Only a present interest can qualify for the $11,000 exclusion. Similarly, assets transferred into a Trust, that holds them for a period of time and then distributes them to beneficiaries, usually do not qualify for the $11,000 gift tax exclusion. The IRS generally views transfers into a Trust as the transfer of a future interest to the beneficiaries. Therefore, giving a gift uses some of your $1 million Exemption from Gift Taxes, unless it is a gift of a present interest that qualifies for a $11,000 annual gift tax exclusion. There are ways around the problem, though, including giving beneficiaries a present right to withdraw the funds you put in. SPOUSAL EXEMPTION A second way to avoid Federal gift and Estate taxes is a transfer to a spouse. You can give your spouse a gift of any amount and it will not incur gift tax. Upon your death, your spouse can receive any amount of money or property under your Will and not pay any estate tax. Using the unlimited Spousal Exemption so that your Estate pays no estate taxes is not always prudent. If a husband owns $1.7 million in assets and the wife has no assets in her own name, transferring $1.7 million to the wife, upon the husband's death, would incur no immediate estate taxes. Upon the wife's death, however, the entire $1.7 million, plus interest earned on the entire amount after the husband's death, would be taxed. The Exemption Equivalent would apply only to the first $1.5 million of the estate. Accordingly, Federal estate taxes would be due. These high taxes could have been avoided by using the Exemption Equivalent when the first spouse died. The first spouse's Will could have distributed $200,000 in assets to someone other than a spouse, either directly or by establishing a Trust. If this had occurred, upon the wife's death, no Federal taxes would have been due, since the remaining $1.5 million would not have been taxable because of the surviving spouse's Exemption Equivalent. MEDICAID Gifts are not only subject to being voided under New Jersey law, they also have ramifications if the giver later applies for benefits under the Federal Medicaid Program. Medicaid is a Federal program administered by each of the States. Half of the money in Medicaid is provided by the States. The other half is provided by the Federal Government. Medicaid is only available to individuals who are indigent. Unfortunately, because of the high cost of hospital and nursing home care, and the high percentage of individuals who spend a significant amount of time at the end of their life in a hospital or nursing home, many individuals need to rely upon the Federal Medicaid Program. The Federal Medicaid Program, because it is designed to pay for the medical care of the indigent, penalizes individuals who have given substantial gifts. Essentially, the Medicaid Program obtains financial records, going back three years from the date an individual applies for Medicaid, and looks at this information for any evidence of a substantial gift. For example, a Medicaid income worker may look at the financial assets and tax returns of a Medicaid applicant and notice that, at one point, the Medicaid applicant owned a vacation home. After the Medicaid worker inquires as to what happened to the home, and learns that the home was transferred to children, the worker will inquire as to what they paid for it. If the transfer was a gift, it incurs a transfer penalty. Medicaid penalizes a Medicaid applicant by making that person ineligible for Medicaid, based upon the amount of the gift given to others. Basically, the amount of all gifts given is divided by $6,050. Getting back to our example, if the vacation home was worth $200,000, the Medicaid applicant would be ineligible for 33 months ($200,000 / $6,050 = 33) from the date that the home was transferred. This is true even though the Medicaid worker only looks at three years worth of financial information. Medicaid presumes that the gift was given for the purpose of obtaining earlier Medicaid eligibility. This presumption can be rebutted, but doing so usually requires a special hearing before an Administrative Law Judge. CONCLUSION As one can see, the simple action of giving a gift has many consequences. If you have any further questions about giving gifts, Estate Planning, the Improvident Gift Doctrine or Medicaid eligibility, please do not hesitate to call Michael D. Bolton, Esq. at (973) 425-0497.