Timing is Everything: A Gift is a Life-Changing Act of Generosity

October 12th, 2012 | written by Nancy Larson

Generosity is an act of kindness.  The timing of generosity is a whole other matter.  In my practice of many years, I have been privy to the concerns of people who want to bestow a gift but must consider the consequences of their generosity.

Consider the 18 year old receives $250,000 by gift or inheritance.  Is that young person mature enough to put it to good use?  Is the receiver of the gift prone to drinking, drug, or gambling; or perhaps vulnerable to being taken advantage of by friends or other family members?  And if so, will the gift be too much to handle … will the receiver of the gift self-destruct?

An act of generosity that was well-intentioned may change the course of the receiver’s life in wonderful ways and be a great blessing.  A gift could be the boost that helps a young couple put a down payment on a house, pays for tuition, pays off credit cards, pays for a vacation.  The same gift received 10 years later or 10 years earlier would have a different impact.

During life you can make decisions about making gifts to your loved ones, churches or charities, but when you are not here to make those decisions at your death the provisions of a trust can direct the timing and amount of distribution.  Managing distributions for grandchildren can be left to a trustee so that education expenses are paid for and that distributions can be made to the grandchild in increments over time.  Some folks simply feel that a young person must make their own decisions whether right or wrong and let the chips fall where they may.

There is a rare opportunity until the end of the year for persons with larger estates to make substantial gifts free of the federal gift tax.  Until December 31, 2012 the lifetime federal gift tax exclusions allows each of us to transfer up to $5.12 million worth of assets to family members or friends free of any federal gift tax.

This truly is an advantage for a person with assets that are in excess of a million dollars.  Given the vast majority of Americans do not own more than a million dollars of assets, this is an unusual opportunity for those with larger estates.

On January 1, 2013, the federal gift tax exclusion is scheduled to drop back to cover only one million dollars worth of lifetime transfers.  It is not clear if Congress will extend the federal gift tax exclusion or let it revert back to the one million dollar level.  As a result, there is an opportunity for those with large estates to make significant gifts prior to the end of the year in order to take advantage of this rare tax advantage.

Although there may be much benefit to gain from this opportunity, always proceed with caution and with due diligence before making any large gifts to family or friends.  Consider the cost of living out the rest of your life and the expenses of long-term care.  If you were to need skilled care in a nursing home it could cost 50,000 to 100,000 a year.

Again, timing is everything. The five-year-look-back period for Medicaid eligibility is a deterrent to giving without close scrutiny of the potential cost for large long-term care expenses for yourself and your spouse.  Use caution in giving away what you may need in the future.

With careful planning, gifting is possible even in the event of the possibility for long-term care in the future.  Often substantial gifts to friends and family are best made within the bounds of a trust, but each situation is unique.  In gifting-related matters, one size does not fit all.  Check out your options and do your due diligence to find if you can benefit from this rare gifting opportunity.

(Published in BND October 2012)