This is topic #4 in this series on how to avoid tying up your estate in probate court after your death. The previous posts in this series have provided an overview of the much-disliked probate process, explained how to avoid probate by using a living trust, and also discussed how joint ownership and naming death beneficiaries can be part of a probate-avoidance plan. Today I will discuss the topic of lifetime giving.
Lifetime giving seems so simple that people sometimes overlook it when making an estate plan. All the term means is giving some of your property away to your family (or anyone else) while you are still alive. Lifetime giving has some potential benefits and drawbacks:
If your have items of sentimental value, ask yourself: Would it be better to give them away while I am still alive? You could pass on your great grandmother’s engagement ring to a relative who is getting ready to propose. Or give a precious crystal collection to a child who is moving into a new home. A will or living trust could of course assign these pieces of property to the same people. However, giving them away during your life gives your loved ones a chance to hear your reasoning for passing on the gifts and allows you to enjoy the memory together.
Additionally, any property you give away during your lifetime by default will not be part of your probate estate after your death. The benefits of this can be substantial. For example, in Illinois, a probate estate containing under $100,000 and no real estate, and meeting certain other criteria, can be handled through “summary administration.” Therefore, by giving away enough property during one’s life (and possibly using other probate avoidance mechanisms), it is possible to avoid probate by shrinking the estate below the threshold. In Illinois, a family under the $100,000 threshold would use a small estate affidavit and avoid the probate court process, a major benefit.
If you are concerned about paying estate taxes, lifetime giving can have a tax benefit as well. In 2014, you can give up to $14,000 each to as many people as you wish, without incurring any gift tax. This money leaves your taxable estate and will not be subject to estate tax when you die. Of course, federal estate tax only applies to estates above $5.34 million this year ($10.68 million per couple). And making lifetime gifts of financial assets that have appreciated in value is often a poor choice, as it wastes the tax benefit known as the automatic step-up in basis at death.
While there are significant benefits to lifetime giving, there are drawbacks as well:
Once you give away property, you can’t change your mind. Elderly people sometimes sign over the title to their house or other property to a child, expecting that the child will continue to allow the elderly person to live there. However, children are not always so scrupulous. Even children who wish to allow their parents to stay might have problems with bill collectors, get sued, or face divorce proceedings. All of these situations could cause the house or other property to be lost to creditors. In short, never give away property that you need to survive.
Additionally, lifetime gifts can cause serious family fighting (and litigation) if you don’t make it clear (in writing) whether those gifts are meant to be counted against a person’s share of your estate when you pass away. Imagine splitting your estate 50/50 between your two sons in your will, but then giving one son a lifetime gift worth $100,000 before you die. The other son will likely assume that you intended that to be subtracted from the other son’s estate, while the gift recipient will not likely see it that way. Don’t think it could happen to your family? Talk to a probate litigation attorney and hear how many times he or she has heard a story like this.
Speak with a qualified estate planning attorney before considering major lifetime giving as a part of your estate plan.