How To Make Effective Deathbed Transfers

Estate Planner Jan-Feb 2000
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Many people want to leave assets or a remembrance at their deaths to grandchildren, other relatives and friends. But giving assets during life instead may result in more of the donor’s wealth passing to beneficiaries and less going to the government as tax. Unfortunately, many people don’t realize this until they are on their deathbeds, and transfers at this time require special planning.

Why Make Gifts?

Donors may have many reasons for not making gifts until after death. They may not want to lose control or possession of assets until they’re certain they won’t need them. Or perhaps they simply have never considered lifetime gifts as alternatives.

But when a donor is not expected to live long, he or she may, for the first time, take seriously the prospect that estate tax will erode assets. Lifetime gifts can cut down on this erosion by removing assets from the donor’s taxable estate. A donor can give up to $10,000 per recipient per year free of gift taxes. It may be too late for donors on their deathbeds to implement other estate reduction strategies, but they can still take advantage of these annual exclusion gifts.

Selection and Timing of Gifts 

Tax considerations can favor gifting certain assets rather than others. The donor should generally select assets with a high income tax basis (close to current market value), such as stock that has not greatly appreciated since its purchase or cash with a 100% basis. The advantage of keeping assets with a low basis is that assets the donor owns at death will generally receive an increased (“stepped-up”) basis to the fair market value as of the date of the donor’s death, thereby eliminating any gain that was built into the asset.

Keep in mind that if the donor’s estate is less than the applicable exclusion amount ($675,000 in 2000, increasing to $1 million by 2006), deathbed gifts will offer no estate tax advantage to outweigh a loss of basis step-up.

Timing is critical with deathbed gifts. Gifts that are not completed will result in the assets not being removed from the donor’s taxable estate. For example, donors giving cash may use checks, but the recipients must deposit the checks before the donor dies. Otherwise, the gift will be includable in the donor’s gross estate for estate tax purposes.

Another way to make sure that beneficiaries actually receive gifts is for the donor to have ready access to the assets to be given. For example, the donor can:

  • Hold cash in a safe.
  • Give jewelry to recipients.
  • Sign deeds to gift real estate or portions of real estate.
  • Assign stock to recipients.
  • Give a brokerage firm written directions.

The donor should also execute a power of attorney for property that specifically authorizes the agent to make annual exclusion gifts.

We’re Here to Help

Please let us know if you would like us to help you develop an effective plan to make tax saving gifts to your loved ones both before and after you’re gone. Planning can help you sort through the many available options in time to find the best alternative. We can help you create an effective strategy and answer any questions you may have about deathbed transfers.

 

 

The Use of Checks

Donors using checks to make gifts should make certain that recipients quickly deposit them. If time is short, the donees should sign over their checks to a third party in exchange for either cash or property. The IRS has successfully argued that gifts are not complete unless checks are cashed before the donor’s death. The gifts remain incomplete until the bank pays the checks because donors can revoke gifts by stopping payment or withdrawing the funds before their bank pays the checks. Consult with your advisor to determine if this sign-over option is viable in your situation.