While deathbed gifts may make for good television, they rarely constitute good estate planning. In fact, deathbed gifts usually result from our own inaction as no one likes to think about dying or plan for their own death. Thinking about your own death is stressful and unsettling as you consider your loved ones and their wellbeing after you are gone. However, you are likely setting your loved ones up for even more stress and grief after you pass away if you fail to create a good estate plan or keep that plan updated. So while deathbed gifts may solve some shortcomings, these gifts made while you are alive, even on your deathbed, bring their own set of problems. No Step-Up in Basis Deathbed gifts can be costly because they are not entitled to a step-up in basis. The “basis” you have in property is essential to determine whether any capital gains have been made, and consequently whether any capital gain taxes are owed when the property is sold. Under federal tax law, a capital gain occurs if property is sold or exchanged for more than its original price. The original price is called its basis. Federal tax law provides that the basis of any inherited property steps up to its fair market value at the date of death. So, if the value of your property appreciates over time, the property will be worth more at the time of your death than when you bought the property originally. Applying the federal law, the step-up in basis wipes out the appreciation in value and any sale of the property immediately after your death will likely not result in any gain, and no capital gain tax would be owed. In contrast, if you make a gift during your lifetime, even one minute prior to your death, the recipient of your gift will have the same basis you had (the “carry-over basis”). As the gift recipient is not entitled to a step-up in basis, sale of the appreciated property will result in a gain, and the gift recipient will owe capital gain taxes on the sale of the appreciated property just as if you had made the sale prior to your death. Example: If, on your deathbed, you decide to give your son a valuable painting you purchased in 1975 for $20,000 that is currently worth $150,000, the painting has appreciated in value by $130,000. Your son’s carryover basis in the painting is the same as yours—$20,000. As a result, if your son decides not to keep the painting and sells it for $150,000, the increase in value of $130,000 will be taxable as capital gain to him. In contrast, if your son inherits the painting at your death, his basis will be stepped up to $150,000, its fair market value on the date of your death. If he immediately sells it, he would have no capital gain, and thus, would benefit from significant tax savings. Possible Inclusion in Your Gross EstateIf you are very wealthy, you may employ a strategy of making lifetime gifts as a way of decreasing the size of your estate and minimizing your liability for estate taxes. This strategy involves making gifts of no more than the annual exclusion amount, and you are free to make an unlimited number of gifts for less than the annual exclusion amount. For 2023, the annual exclusion amount is $17,000, so, only gifts of $17,000 or more, have to be reported to the IRS and are deducted from your lifetime exclusion (currently, $12.92 million). Consequently, if you make gifts to ten (10) people of less than $17,000, you can reduce your estate by nearly $170,000 this year, and if you continue this practice for nine more years – at the 2023 exclusion rate – then you can reduce your overall estate by $1.7 million within 10 years. Similarly, if you are on your deathbed, then you can reduce your estate this year by the same $1.7 million by giving the same gift of less than $17,000 to 100 people. However, to accomplish this reduction to your estate, the gifts must be “completed.” The definition of a “completed gift” will depend on state law. For example, the law could require that in the case of a gifts made by check that the checks be cashed (cleared and posted to the recipient’s account) by the time of death. And if you wait until you are on your deathbed to write those checks, any checks that have not cleared and posted to the recipients’ accounts will be included in your estate as those checks are not considered “completed” gifts. Doubts about Your Capacity Deathbed gifts may raise questions about your capacity to make decisions. To make a valid gift, you must have the mental capacity required by state law, but those standards vary by state. Some states apply the same standard that must be met to make a valid will:
If you make a gift on your deathbed, the gift may disrupt your estate plan or the expectations of those people around you (i.e., had you not made a gift of the property, then these people would have likely inherited that gifted property). These unhappy people may subsequently question your mental competency to make the gift on your deathbed. Although making a gift on your deathbed is not enough on its own to show that you lacked the capacity to make the gift, these unhappy people can make a litany of arguments to question the validity of the gift:
Because any such argument would have to be resolved by a court, deathbed gifts do not create legal certainty and may even propel your loved ones into family splitting litigation. We Can Help You Plan Ahead While deathbed gifts can be useful, associated risks however may outweigh the benefits of making such gifts. We can help you minimize these risks if you must engage in deathbed gifting. However, you can avoid these risks by creating a careful estate plan and keeping that plan updated. While a good and updated plan should reduce any taxes that could be owed and preserve family harmony, the plan should most importantly provide you the peace of mind that you have done what you can to take care you and your loved ones. Talk to us about creating a careful and thoughtful estate plan and keeping the plan current to meet the challenges and changes in your life and in the lives of your loved ones.
When considering what to do with your remains, you may think there are only two options - burial or cremation. However, neither option is particularly environmentally friendly. Burial is arguably the worst option. According to Kelly MacLean in her January 2018 article, 7 Eco-Friendly Options for Your Body after Death, burials use an estimated
Some of that 4.3 million gallons of carcinogenic embalming fluid likely leaks into the earth, polluting our water and soil.Cremation, often considered the greener option, is not much better. MacLean suggests cremation may consume as much gas and electricity as a 500-mile road trip and may release around 250 pounds of carbon dioxide. Some nontraditional, eco-friendly burial ideas are: AquamationAquamation (also known as water cremation or alkaline hydrolysis) - a water-based alternative to traditional cremation has been legalized in about twenty states including Maryland. It uses a solution of water and potassium hydroxide or sodium heated to approximately 350 degrees Fahrenheit. At the end of the process, only the bone matter is left, which can be dried and crushed and given to your loved ones. Desmond Tutu, the Anglican archbishop, anti-apartheid leader, and environmental advocate, requested aquamation instead of cremation by fire likely because he knew that aquamation uses an estimated 90 percent less energy than cremation by fire. After the aquamation process was complete, his ashes were interred in St. George’s Cathedral in Cape Town, South Africa Mushroom Burial Sui Actor Luke Perry, best known for his work on Beverly Hills, 90210 TV series, was buried in a specially made biodegradable mushroom suit after his organs were donated. While this may sound like a quirky celebrity antic, the creator of the mushroom burial suit says the mushroom spores that line this special suit are trained to consume dead human tissue. Human remains contain toxins that are released into the atmosphere during cremation or through other methods of burial. Mushrooms can absorb and purify these toxins, resulting in a cleaner earth. After breaking down human tissue, the mushrooms conduct the nutrients from the body to fungi in the soil that then pass these nutrients on to trees. Green BurialIf being buried in a mushroom suit is not your preferred method, you may want to consider a green burial. A green burial is a burial that does not use embalming fluids, toxic chemicals of any kind, or even a gas-guzzling machine to dig the grave. Instead, the green burial ground staff—or even your loved ones themselves—dig the grave by hand. Moreover, by using caskets made from biodegradable materials, such as wicker (and not using a cement burial vault), a green burial allows your body to decompose naturally. Alternatively, the casket can be eliminated completely, and the body can simply be buried in a cloth shroud. Green burials occur in traditional cemeteries and in new cemeteries such as preservation sites (land trusts and nature preserves). Sea BurialIf you love the ocean, a sea burial may be perfect for you. Sea burials may be a more familiar eco-friendly option, as this method has been used for centuries by Vikings, pirates, and sailors. Today, sea burials may take the form of using a water-soluble urn or submerging a modified casket down to the ocean floor. More environmentally conscious sea burials may use natural burial shrouds or mix the person’s ashes with an eco-friendly concrete that is used to construct artificial reefs that foster aquatic life. RecompositionRecomposition, or body composting, is the process of converting human bodies into soil using natural means. The body is placed in a container with a mixture of wood chips, straw, and other organic materials that are then exposed to heat and oxygen to accelerate the decaying process. After about thirty days, the remains decompose into about a cubic yard of soil, which your loved ones can use in their gardens. Unfortunately, if you want to return to Mother Earth in this way, body composting is currently legal in only three states: Colorado, Oregon, and Washington. However, more states are considering legalizing the process, and body composting may soon gain in popularity. Final Thoughts - PrepaymentMaking decisions about the disposition of your remains can be an emotionally stressful experience for your loved ones. In the crisis of your demise, they are less likely to consider these better environmental alternatives. Therefore, you will want to prepay in advance for your funeral and burial arrangements to assist them. You will also want to make sure your preferences are expressed in your estate plan. A good estate plan serves your grieving loved ones and family at the time of your death and as they go on without you.
“Just-in-case” planning means more than packing a rain jacket for your weeklong vacation in the sun . . . Just in case planning includes considering what will happen if one of your loved ones becomes disabled after you completed your estate plan. At the time you completed your estate plan your loved one was not disabled, but after you have completed your estate plan life happens and your loved one is now disabled. We want to think – for better or worst – that disability affects other people. Facts, however, prove otherwise:
Without a crystal ball to see into the future we, of course, do not know of our own demise nor the wellbeing of our loved ones at the time of our demise. Consequently, the future welfare of your loved ones may depend on whether you have considered the critical question of what will happen if your loved one becomes disabled at a future time. Things to Know about Disability BenefitsThe welfare of a disabled loved one depends on them qualifying for government benefits. More than financial assistance, disability benefits include an array of services available to disabled persons, who are deemed economically eligible. Unfortunately, a monetary gift or inheritance from you may disqualify this loved one from being economically eligible. While the inheritance may replace lost economic assistance, the loss of access to daily services will disrupt their lives in unimaginable ways. If this disruption happens, your well-meaning gift could become more of a curse than a blessing. Standby Supplemental Needs TrustTo avoid the possibility that a disabled loved one will lose access to the array of disability services because he or she has too much money, you will want to set up a standby supplemental needs trust as part of your estate plan.
A “standby” supplemental needs trust does just what its name implies: the supplemental needs trust is not funded automatically but is on standby. The trust comes into existence (i.e., is funded) only if a beneficiary is disabled at the time of your death or even later. (Some states’ disability eligibility rules permit the trust to spring to life if your loved one becomes disabled later after your death but before the inheritance has been fully distributed.) If at the time of your demise your loved one is disabled and is receiving disability benefits, the inheritance he or she will receive from you will be adjusted to a distribution in a supplemental needs trust, which will not disqualify your loved one from continued receipt of disability benefits and services. At this point the inheritance now in the supplemental needs trust can be spent on any expense not covered by disability benefits paid for by the government. Thus, the inheritance will supplement the disability benefits, and truly enhance your loved one’s life without disrupting the benefits and services they already receive. Final Thought. Since you do not know whether the loved one whom you are leaving an inheritance will become disabled, then your estate plan should include supplemental needs trust provisions. If you do have these standby supplemental needs trust provisions in your estate plan – and you need them – then it will take more time and even more money to correct the problem. However, if it the standby supplemental needs trust is not ever needed (i.e., no one actually becomes disabled), then this trust will never be funded. So you should be sure to include the standby supplemental needs trust provisions in your estate plan—just in case. |
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