Making Planned Gifts Before Death

My mother’s health has declined in recent months, causing a little of year-end financial upheaval in our family. (The term “drama” is a bit overstated. Maybe that caused some financial stress at the end of the year?)

Long-term readers may recall that my mother has been in assisted living for over a decade. She leads a simple existence full of television, her favorite cat, and a set routine. It’s tough for her to communicate since she has cognitive issues. The doctors describe her as “nonverbal,” and they can’t explain why. She is unable to make whole phrases (often two words are difficult! ), and it appears that she is unable to formulate sophisticated concepts. Everyone is perplexed.

Today — right now — my brother is driving my mother to the emergency department. It’s her third visit in six weeks, and the symptoms are the same: vomiting, dehydration, and bewilderment. During the previous two occurrences, a few days in the hospital helped her, and she returned to the assisted living home feeling better (and actually able to hold a basic conversation with a two-year-old).

So, Mom’s health is declining. That’s important point number one.

Second, her estate is larger than we previously thought. For many years, we thought Mom barely had enough to live on. And she has never had a lot of money in her bank account. However, when we looked at her net worth, we discovered that Mom truly had a significant estate.

First and foremost, she owns an old house on two acres of property. Second, she has a 60% stake in the family box factory. Third, she owns the two acres on which the box factory is located, as well as the majority of the structures on the property. Following that, she has $66,000 in her bank accounts. Finally, she has $437,000 in a Vanguard SEP-IRA.

She has a net worth of approximately $1.5 million, of which approximately $500,000 is liquid.

If Mom died today (or tomorrow, or next month), the portion of her estate worth more than $1,000,000 would be liable to a 10% estate tax. (This is the estate tax in Oregon. The federal estate tax exemption is ridiculously large. Is it really that high?!) Based on her existing balances, her tax liability would be around $50,000 — 10% of $500,000.

Please note that although I’ve done my best to provide accurate numbers and information in this article, it’s quite possible that I’ve made a mistake. I’m not an accountant, nor am I a financial planner. Please feel free to offer corrections.

Now, it’s common in situations like this for an older person with wealth to reduce estate taxes by gifting assets before they die.

Under current US tax legislation, you can make a tax-free gift of up to $15,000 to any individual each year. Because Mom has three boys, she could gift each of us $15,000 each year with no tax consequences. This $45,000 in donations reduces her estate by $45,000, saving her $4500 in future taxes.

My cousin Duane, who has no financial interest in any of this (but has been making tax-free donations to his family due to his own struggles with throat cancer), believes it would be silly not to make these tax-free gifts from Mom’s estate in 2022. We are, according to Duane, “flushing $4500 down the toilet” if we do not write three $15,000 checks today.

However, there are other considerations.

• The first (and most important) is that I have power of attorney for my mother. I take great care to avoid anything that appears to be self-serving. I’ve heard numerous horror stories from other families in which one or more people practically plundered an old parent’s fortune. That’s not who I want to be. (However, this isn’t one of those cases.)
• Second, Mom’s costs are rising. Her monthly fee at the assisted living home, for example, is increasing, and she has clearly been suffering significant medical bills recently. (However, her health insurance will cover the majority of those expenses.) My brothers and I are concerned that Mom may not be able to afford all of her bills in the future. This may be an unfounded worry, but it’s still a worry.
• Third, the estate tax is merely one piece of the equation. I sent an email to my accountant. He stated that it is often preferable for beneficiaries to inherit assets rather than be given them. “If the assets are gifted,” he said, “their [cost basis] is the same as your Mom’s basis.” If you inherit, the fair market value at the time of death is your basis.” In the case of non-cash assets, it sometimes makes sense not to make presents before death.

So there’s a lot to consider here. (And I haven’t even mentioned all of the factors – just the most crucial ones.)

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Here’s what this looks like from a practical perspective.

Mom already took her RMD (required minimum distribution) of $14,169.69 from her SEP-IRA this year because she is over 70-1/2. If she withdrew an extra $45,000 from her Vanguard account today, her SEP-IRA withdrawals for 2022 would total $59,169.69. The first $40,400 of that amount is tax-free. The remaining $18,769.69 is liable to a 15% long-term capital gains tax, for a total tax of $2815.45. Her eventual estate tax would be reduced by $4500 if she gave $45,000 today. Making these gifts would thus result in a net tax savings of $1684.55.

If we waited until tomorrow (January 1st) to withdraw the money from her Vanguard account (while writing the checks today — the checks must be written today), it would not only serve as her RMD for 2023, but it would also raise the 0% tax bracket from $40,400 to $41,675, resulting in a $498.75 tax liability. The net savings from the future estate tax would thus be $4001.25, which is quite a sum.

However, I don’t believe we’ll be making presents from Mom’s estate in 2022. For one thing, my brothers and I am concerned about her financial position. We don’t want to drain her savings in case she needs it for future medical expenditures. Another issue is the logistics at this point (one o’clock in the afternoon on the last day of the year, with me ninety minutes from the box factory and my brother at the hospital with my mother).

But it looks like we’ll be having some intriguing (and hard) discussions concerning Mom’s estate in 2023! Perhaps it’s time to sell the family farm?

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