Drama in real life: Making planned gifts before death

My mother’s health has been declining over the past few months, and it’s produced a wee bit of year-end financial drama in our family. (The word “drama” is a bit of an exaggeration. Maybe it’s produced some year-end financial consternation?)

As long-time readers will recall, my mother has been in assisted living for more than a decade now. She lives a mellow life filled with television, her pet cat, and a regular routine. Because she has cognitive problems, it’s difficult for her to communicate. The doctors call her “non-verbal”, and they can’t explain the cause. She cannot form complete sentences (sometimes two words is tough!), and it seems as if she cannot formulate complex thoughts. It’s a mystery to everyone.

Today — at this very moment — my brother is driving my mom to the emergency room. It’s her third visit in six weeks, and it’s always the same issue: vomiting, dehydration, confusion. During the previous two episodes, a few days of hospital rest helped her, and she returned to the assisted living facility feeling better (and actually able to carry on a basic conversation, like you might have with a two-year-old).

So, Mom’s health is declining. That’s important point number one.

Important point number two is that her estate is larger than we once realized. For many, many years we believed that Mom had barely enough to get by. And it’s true that she’s never had a lot of cash in her bank account. However, we recently realized that when you look at her net worth, Mom actually has a sizable estate.

First, she owns an old house on two acres of land. Second, she owns 60% of the family box factory. Third, she owns the two acres on which the box factory sits and most of the structures on the land. Next, she has $66,000 in her bank accounts. Lastly, she has $437,000 in a SEP-IRA with Vanguard.

All told, she has a net worth of roughly $1.5 million, of which about $500,000 is liquid.

If Mom were to die today (or tomorrow or next month), that part of her estate in excess of $1,000,000 would be subject to a 10% estate tax. (This is the Oregon estate tax. The federal estate tax exemption is absurdly high. Good grief, is it high!) So, based on her current balances, that tax obligation would be about $50,000 — 10% of $500,000.

Please note that although I’ve done my best to provide accurate numbers and information in this article, it’s quite possible that I’ve made a mistake. I’m not an accountant, nor am I a financial planner. Please feel free to offer corrections.

Now, it’s common in situations like this for an older person with wealth to reduce estate taxes by gifting assets before they die.

Under current U.S. tax law, each year you can make a tax-free gift of up to $15,000 to any individual. Because Mom has three sons, she could give us each $15,000 per year without any sort of tax consequence. This $45,000 in gifts would reduce her estate by $45,000, theoretically saving $4500 in future taxes.

My cousin Duane, who has no financial interest in any of this (but who, because of his own struggles with throat cancer, has been giving tax-free gifts to his family), believes strongly that it’d be foolish to not make these tax-free gifts from Mom’s estate in 2021. To Duane, we’re “flushing $4500 down the toilet” if we do not write three $15,000 checks today.

However, there are other considerations.

• First (and least) is that I have power of attorney for my mother. I’m very careful to avoid anything that would look even remotely self-serving. I’ve heard plenty of horror stories from other families where one or more people has essentially raided the wealth of an aging parent. I don’t want to be that person. (But honestly, this isn’t one of those situations.)
• Second, Mom’s expenses are increasing. Her monthly rent at the assisted living facility is going up, for example, and she’s clearly incurring additional medical expenses lately. (Although her health insurance will cover a bulk of those costs.) My brothers and I are worried that Mom won’t have enough money to cover all of her expenses in the future. This may be an unfounded worry, but it’s still a worry.
• Third, estate tax is only part of the equation. I e-mailed my accountant. He pointed out that sometimes it’s better for beneficiaries to inherit assets rather than be gifted them. “If the assets are gifted,” he wrote, “the [cost basis] in those assets are the same basis as your Mom’s basis. If you inherit, your basis is the fair market value at the time of death.” Translation: For non-cash assets, sometimes it makes sense to not make gifts before death.

So, there’s a lot to think about here. (And I haven’t even shared all of the considerations — only the most important ones.)

Here’s what this looks like from a practical perspective.

Because Mom is over 70-1/2, she already took her RMD (required minimum distribution) of $14,169.69 from her SEP-IRA this year. If she were to withdraw an additional $45,000 from her Vanguard account today, that’d put her SEP-IRA withdrawals at $59,169.69 for 2021. The first $40,400 of that is subject to zero tax. The next $18,769.69 is subject to 15% long-term capital gains tax, for a total of $2815.45 in taxes. Gifting $45,000 now would reduce her future estate tax by $4500. So, making these gifts would save a net of $1684.55 in taxes.

If we were to wait until tomorrow (January 1st) to withdraw the money from her Vanguard account (while writing the checks today — the checks must be written today), that would not only serve as her RMD for 2022, but it would also bump the 0% tax bracket from $40,400 to $41,675, which means the tax liability for the transaction would be $498.75. The net savings vs. future estate tax would thus be $4001.25, which is indeed a chunk of change.

Ultimately, however, I don’t think we’re going to make gifts from Mom’s estate in 2021. My brothers and I are too nervous about her financial situation, for one. We don’t want to deplete her cash if it might be needed for future medical expenses. For another, the logistics are problematic at this point (one o’clock in the afternoon on the last day of the year with me ninety minutes from the box factory and my brother with my Mom at the hospital).

But going into 2022, it feels like we’ll be having some interesting (and complicated) discussions about Mom’s estate! Maybe it’s time to sell the family homestead?