Not as Much Time as You Think (Part 2)

       In last week’s blog post I started to tell you about Mary’s call to our office. She reached out because her dad, who was in the hospital, wanted to make a change to his will to leave his home to Mary. It’s something he had told her he would do several years ago but just never got around to it. We scheduled an appointment but he died the next day.

       The next week Mary called back to discuss Dad’s wish and the probate of his will. She related to me that while his will left everything equally to Mary and her sister, Kate, both of them were aware of Dad’s wish. “Kate has agreed to honor Dad’s wish”, Mary told me. “Can’t we transfer the title directly to me”, she asked.

       I explained to Mary that the will needs to be probated. As the named executor, it is her job to carry out her dad’s wishes as set forth in that will. Even though he communicated to both Mary and Kate his desire to leave the home to Mary he did not put it in writing in a form that would qualify as a will. The executor is bound to follow the instructions set forth in the last will he did leave.

       So is that it? What about Kate’s agreement to abide by their dad’s wish anyway? Mary and Kate can certainly agree to any other arrangement made between the two of them. If, however, Kate agrees to honor their dad’s wish, she would be gifting her half interest to Mary because legally the 50% interest is hers. A gift carries with it tax implications.

       While New Jersey does not have a gift tax, there is federal gift tax to consider. For 2019, each person can make a gift of $15,000 per person per year free of federal gift tax. Gifts greater than that amount can result in a tax paid by the donor (gift giver}, however, the donor can choose to apply the excess gift towards his/her lifetime exemption which is currently $11.4 million. This is the amount that each person can pass to heirs during a combination of lifetime or at death which avoids federal gift and estate tax.

       Sounds like a pretty easy solution. Not so fast. There are other considerations. Kate is only in her 40’s. What happens if the federal tax exemption changes? What if Congress reduces the exemption? Then if Kate uses some of her exemption now her estate could be faced with taxes when she dies. In other words, the exemption may not be so high in the year of her death. A gift now could have implications for her estate later.

       Next week I’ll explain a little more.