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Family Gifts and Loans: Are They a Good Idea?

By Letha Sgritta McDowell, CELA CAP

Often clients will ask about giving or loaning money to family members. Questions range from “Will I pay tax?” to “Is this a good idea?” While money and family decisions are extremely  personal, there are some considerations or “ground rules” which remain universal.

The question that arises most frequently is whether there are tax consequences to the gift.  Many have heard of an exemption but don’t understand what that means. The recipient of a gift never pays tax on the gift so there should never be a concerns that well-intentioned gifts come with a tax consequence to the recipient. However, in some rare instances, the donor of the gift pays tax. Current tax regulations allow an individual to give $15,000 per recipient ($30,000 if a married couple is making the gift and each spouse joins in the gift) without reporting the gift to the Internal Revenue Service. The $15,000 “limit” isn’t actually a limit; instead the $15,000 is a reporting threshold. Current tax regulations allow an individual to transfer $11.4 million without paying tax. Technically the $11.4 million is a unified credit, meaning that amount can be transferred either during lifetime or at death or in some combination. Therefore, if an individual gives their child $1 million as a Christmas gift (above the $15,000) they would report the gift using a Form 709. This gift would result in no tax due, however, at their death, they would only be allowed to transfer $10,415,000 without paying any tax ($11,400,000- ($1,000,000-$15,000)).

Therefore, the $15,000 annual exclusion only makes an impact for individuals with assets exceeding $11,400,000. And, since the vast majority of Americans do not have assets exceeding that amount, the exclusion is fairly irrelevant. There is the potential for this amount to “sunset” in the year 2026, however, even if that were to occur, the exemption is still at $5.49 million.

Since taxes are not an issue for most, then the conversation can focus on whether a gift is a good idea. First, the donor should examine whether he or she has the resources to make the gift. Often I’ve encountered an older adult (parent/grandparent) with very little in savings, who no longer works, who is also trying to give money to a child or grandchild. If that individual doesn’t have sufficient resources to pay their own expenses for the remainder of their lifetime, including potentially catastrophic long term care costs, then I do not recommend gifting. Especially in cases where the recipient has the ability to work, earn a living wage, and still save for their retirement.

Next, assuming the donor has the financial means to make the gift, I recommend considering the motive behind the gift. Is the gift being made to assist the recipient with something worthwhile, such as start-up capital for a business or a down payment on a house? A gift from a willing donor may be just what is needed to make the recipient successful. If a donor is concerned that making such a gift will spoil a child’s drive to succeed or result in a lack of appreciation, then I encourage them to consider the recipient’s personality. The donor will already know if the child has the mindset that they will use the gift to leverage to something better. The donor is aware of the ambition, drive, and personality of the recipient and an individual who has already shown a lack of appreciation or a lack of drive will not change simply because of a gift. Similarly, someone driven to succeed will not change simply as a result of a substantial gift.

Closely related to family gifting is loaning money to family. No interest loans carry no tax consequences and the considerations should be the same for gifting as for loaning. Is the loan just what the borrower needs to leverage into success? If so, then the loan can be a welcome way to aide in someone’s future. When individuals make loans, they do so with the expectation of being repaid. However, when advising clients regarding a loan to family, I encourage them to treat the loan as if they will not be paid back. Unfortunately, often family loans are never repaid leaving hurt feelings and frustration. If the lender approaches the situation with no expectation, then he or she is pleasantly surprised when one is repaid. In addition, the ability of the lender to make the loan should be reviewed with the expectation of not being re-paid. Thus the lender should have sufficient income and savings to reasonably cover life expenses.

Finally is the issue of how gifts or loans work for purposes of an inheritance. A person’s estate plan is extremely personal and their decision about who should benefit after their passing should be their reflection of wishes and not based on obligation or other societal norm. That being said, many wish to treat their children or other family equally and, if they have made gifts or lent funds not yet re-paid, then provisions can be made within an estate plan to ensure equality. It is critical to make the drafting attorney aware of such gifts or loans as well as the desire to equalize and then to review account titling and beneficiary designations to ensure they are consistent with the plan.

While family gifts and loans should be carefully considered before the transaction is made, they can be extraordinary ways to assist in a loved one’s success with the added benefit of the donor seeing the benefit during their lifetime.

Ask Kit Kat: Outer Banks Star

Hook Law Center: Kit Kat, what can you tell us about a mule named Raymond who lives on the Outer Banks, NC and thinks he’s part of the herd of wild horses?

Kit Kat: Well, Raymond is indeed a mule. His daddy was a donkey that was once owned by a petting zoo in Virginia Beach. Somehow, his daddy made his way to the Outer Banks of North Carolina, and mated with one of the mares in the wild herd there. Hence, Raymond. He’s now 20 years old, and could live as long as 30-50 years. Visitors to the Outer Banks sometimes question what they have seen when they visit. Is there really a mule that is part of the herd? Meg Puckett or Jo Langone of the Corolla Wild Horse Fund answer them in the affirmative.

What draws people to Raymond are his antics. He doesn’t let his smaller stature prevent him from tousling with stallions. Sometimes he gets the better of the stallions and sometimes he doesn’t. When they get too close to the mares he likes to spend time with, he will nip at the stallions’ legs or turn around and kick them with his hind legs. If a foal is produced by a successful mating between a stallion and a mare, Raymond, who as a mule is infertile, is very protective of it, and treats it as if it were his. Raymond also tends to be more vocal than the wild horses. He brays and makes other noises which can be quite loud at times. The visitors to the Outer Banks are mesmerized by his behavior.

Meg Puckett of the Corolla Wild Horse Fund, which manages the herd, says, “I can’t express how good he looks for his age and the rough life he’s led. He is tough.” He’s had a little bit of help from a local veterinarian. When it was noticed that his hooves were not wearing down naturally by walking on the sand dunes as happens with most of the horses, a veterinarian intervened. Raymond was sedated, and his hooves were ground down a bit. It was kind of a risky enterprise, but it was successful. With Raymond’s pain relieved, he’s back to his old self—frolicking and standing up to the stallions.

So next time you’re on the Outer Banks of NC, you may want to see if you can catch a glimpse of this wonderful creature! (Jeff Hampton, “Everybody loves Raymond,” The Virginian-Pilot, June 17, 2019, p.1 & 9)

Posted on Friday, June 28th, 2019. Filed under Senior Law News.

What You Need to Know About an Offer in Compromise

By Hook Law Center

If you are like most taxpayers, you do not enjoy opening mail from the IRS, especially if the IRS is after you to collect a tax liability.  Fortunately, there may be solution for you to settle your tax debt for less than the full amount owed; this is called an offer-in-compromise.

To start the settlement process, the taxpayer makes an offer to the IRS in writing using IRS Form 656. An offer is an official agreement between you and the IRS to settle the debt for less than you owe. To be considered, the offer must be based on what the IRS considers your true ability to pay. It is important to remember that submitting an application does not guarantee the offer will be accepted. The offer essentially begins the process of evaluating and reviewing your circumstances to determine your ability to pay. During this process, the IRS will review your application and determine if 1) you are unable to pay the full amount, 2) whether there is doubt as to how much the tax liability is, 3) collection of the tax liability would create economic hardship for you (for example, due to your loss of employment, health issues, etc.), or 4) compelling public policy and equity considerations.      

Generally, the IRS will not accept an offer, if they believe you are able to pay the debt in full or through an installment agreement. However, if after reviewing your offer and determining that you are unable to pay the entire debt, the IRS will accept partial payments to no payment at all.  

Before submitting an offer, you must first determine your eligibility which includes: 1) filing all individual tax returns, 2) up-to-date on all required estimated tax payments for the current year, and 4) if you own a business, make all required federal tax deposits for the current quarter.         A streamlined offer-in-compromise program is available for taxpayers with annual incomes up to $100,000. In addition, the taxpayer must have tax liability of less than $50,000. Taxpayers should be aware that there is a $5,000 penalty applies to any person who submits a frivolous or fraudulent application for an offer in compromise. However, the penalty is clearly aimed at those who abuse the process and should not deter taxpayers with legitimate offers from using the compromise process.

Please call if you would like to discuss whether submitting an offer-in compromise would be beneficial to you.

Ask Kit Kat: Seals & Antarctic Mystery

Hook Law Center: Kit Kat, how did seals help solve an Antarctic mystery?

Kit Kat: Well, the seals had a little help from scientists, but they worked together to shed light on a mystery which was puzzling to scientists. In 2016 and in 2017, scientists noticed that there was a large hole of open water in the middle of the Weddell Sea which is part of the southern Ocean and is located east of the Antarctic Peninsula. Normally, the Weddell Sea is frozen much of the year, so it was extremely rare that open water about twice the size of the state of Vermont would occur. This phenomenon is known as a polynya. According to Ethan Campbell, one of the scientists on the project, “We thought this large hole in the sea ice—known as a polynya—was something rare, maybe a process that had gone extinct. But the events of 2016 and 2017 forced us to reevaluate that.”

Now here’s where the elephant seals enter the picture. The scientists outfitted some of these local seals with antennae to their heads. The seals didn’t seem bothered by the attachments, and they went about their normal business of cavorting and diving as usual. The antennae then transmitted information to the scientists. With this data, the scientists were able to reach some conclusions. Apparently, polynya are formed when certain unusual conditions occur simultaneously. When strong storms occur near an underwater mountain (the case here), it causes the sea water to churn and swirl. This brings water from the deeper parts of the ocean to the surface. Water from ocean depths tends to be saltier. The saltier water leads to melting ice, which doesn’t refreeze after the storms subside, even though some of it sinks back to deeper depths eventually. Apparently, this is what occurred in 2016 and 2017.

We will have to wait and see if the phenomenon of polynya occurs in the future. However, we can thank the elephant seals in Antarctica for their help in understanding the phenomenon.


Posted on Monday, June 24th, 2019. Filed under Senior Law News.

Can I Really Use My IRA to Pay For Long-Term Care Insurance?

By Jennifer Rossettini, CFP®

Many of our readers have two things in common: (1) they are not fans of “traditional” long-term care insurance, and (2) they are not fans of being required to take distributions from their IRA’s when they reach a certain age.  If you find yourself nodding your head and saying, “Me too!,” I have some good news for you.  With the right approach, you can take those Required Minimum Distributions (RMD’s) that you do not need and repurpose them to pay for “non-traditional” or “hybrid” long-term care insurance benefits.

When thinking about long-term care insurance, most people think of what is now considered a “traditional” long-term care policy.  These are the policies that you pay a premium for and if you need coverage it is there, but if you don’t need coverage, you lose the premiums paid.  Traditional policies are much like auto or home-owners’ policies – you pay for them with the hope that nothing terrible happens to your home or car, and you pay for them regardless of the “use it or lose it” nature of them.  Unfortunately, even though the chances of needing long-term care are greater than, knock-on-wood, getting into an accident, very few people choose to insure against this risk.

Why is this the case? Well, for one thing, it is thought to be expensive.  For another, it has the reputation for hefty premium increases.  And, as it turns out, rightfully so.  It was recently reported in The Virginian-Pilot that an estimated tens of thousands of Virginians will soon be hit with a double- or triple-digit percentage increase in premiums.[1]  Insurers have asked the State Corporation Commission to approve these rate hikes, because they have spent over a quarter of a century incorrectly estimating how long people stay in nursing homes and how many people would drop their policies.[2]  “Insurers kept initial premiums low and aggressively marketed policies, expecting many buyers to drop coverage when prices went up.”[3]  However, more people kept the policies than the insurance companies counted on, thereby causing the payout on claims to be much higher than expected.

Alternatives to traditional long-term care insurance come in the form of “hybrid” policies.  These hybrid policies give the policy owner access to the death benefit, or a multiple of the death benefit, if long-term care services are needed.  If long-term care services are not needed, or if not all of the death benefit is used up to pay for long-term care expenditures, the remaining death benefit is paid out to the designated beneficiaries upon the death of the policy owner.[4]

An example of such a hybrid policy is a product offered by State Life/OneAmerica.  It is a Whole Life life insurance policy with a Continuation of Benefits (COB) Rider.  You make a one-time deposit into a life insurance contract with the COB rider and receive a death benefit for your heirs as well as a lifetime long-term care benefit. 

To use an example, let’s assume that a male, aged 70, and a female, aged 71, are looking for a way to leverage a portion of their savings to fund long-term care expenses.  They also do not need their RMD’s to support their lifestyle.  Her IRA, which is valued at $119,000, has an RMD of $7,800.  His IRA will have an expected RMD in the first year of $3,300.  They could roll over her $119,000 IRA into the base policy and use the annual RMD’s from his IRA, net of taxes, to pay for the COB Rider. In exchange, they will receive lifetime long-term care benefits equal to $62,300 per year for each of them or $124,600 for both of them.  They are able to repurpose the $11,000 annual RMD’s that they didn’t need into something that they could very well need in the future.  But, even if they do not use the long-term care insurance, their heirs will receive a death benefit.

If you are interested in exploring this and other types of hybrid long-term care policies, the professionals of the Hook Law Center, P.C. can help you analyze your situation and introduce you to the right partner to meet your needs.


[2] Id.

[3] Id.

[4] Jamie P. Hopkins, Rewirement: Rewiring the Way you Think About Retirement,” p. 69 (2018).

Ask Kit Kat: Elephant Sense of Smell

Hook Law Center: Kit Kat, what can you tell us about elephants and their capacity for smell?

Kit Kat: Well, as you might suspect, elephants have large, long noses in their trunk. So, it’s not much of a stretch to imagine that their capacity for smell would be greater than some smaller creatures in the animal kingdom, including humans. Why this is important to know is that it may have implications for keeping elephants safe from predators when they wander beyond protected areas, tempted by smells that we may not even be aware of.

To test ideas about whether or not elephants possess greater olfactory capabilities than most animals, Dr. Joshua Plotnik of Hunter College in New York City devised some experiments. Six Asian elephants, which were blindfolded, were presented with plastic buckets with varying amounts of sunflower seeds. The buckets had lids, but also had holes, so the waft of odor of the contents could escape. “Remarkably, when we put two different quantities in the buckets, the elephants consistently chose the quantity that had more over less,” according to Dr. Plotnik.  For example, when there were large differences between the amount of seeds in a particular container, say 30 v. 180 seeds, the elephants were very accurate in picking the larger bucket. When the quantity varied slightly, say 150 v. 180, their accuracy slipped to about 50%. This proved Dr. Plotnik’s hypothesis that elephants have a powerful sense of smell which is not dependent on sight.

Why is this experiment important? Elephants in Thailand and Africa have spilled over from their protected areas into humans’ farmlands. Inhabitants love the elephants, but they don’t want their crops destroyed. It’s becoming quite a problem. Perhaps if there is more understanding what is attracting the elephants, better solutions can be devised to keep them in the areas which have been designated for them. It’s all about co-existing without expense to any group. (Veronique Greenwood, “Elephants May Sniff Out Quantities With Their Noses,” The New York Times (Trilobites), June 4, 2019)

Posted on Monday, June 17th, 2019. Filed under Senior Law News.

Maintaining Internal Systems and Strengthening Integrated Networks (MISSION) Act Goes into Effect

By Shannon Laymon-Pecoraro, CELA

Signed into law on June 6, 2018, the MISSION Act is designed to strengthen the ability of the Department of Veteran’s Affairs (VA) to deliver easily accessible high quality care at VA facilities, virtually, and in the community. The MISSION Act went into effect on June 6, 2019.

The MISSION Act came after a study in 2014 that revealed hundreds of thousands of veterans were waiting weeks, sometimes months, for medical appointments at VA health facilities, with some veterans dying while they waited for an appointment.

The law requires the VA to establish new quality and access standards for care received outside VA facilities. While the MISSION Act will better integrate the VA with community health care providers and tackle issues associated with the VA’s outside care program, ultimately expanding health care options, the MISSION Act is also designed to maintain the VA’s infrastructure for those who receive care at VA facilities. To do so, the MISSION Act requires the VA to review its medical centers and clinics to determine whether they are properly structured to serve the veteran population, and put assets and resources into locations that will benefit veterans most.

A key component of the MISSION Act was to provide urgent care benefits to Veterans while promoting choice and access to timely, high-quality care. Rather than being required to go to a VA facility emergency room for urgent care issues, the MISSION Act allows veterans to go to civilian urgent care facilities. To receive care, and have the VA cover the cost, the following conditions exist:

  • The care provider must be part of the VA’s contracted network of community healthcare providers
  • Must be for urgent care –  preventative care or dental services will not be covered
  • You must be enrolled in VA healthcare and have received care through the VA within 24 months
  • You may be charged a copayment, of  up to $30,  for your urgent care visit which will be billed by the VA, not the care provider
  • A prescription for more than a 14-day supply must be filled by the VA and there may be copays for prescriptions filled outside of the VA

There are additional benefits under the MISSION Act, such as access to the caregiver program for veterans who have incurred or aggravated serious injuries while serving in the activity duty military. Additionally, the VA must provide access to community care if the VA does not offer the services required by the veteran, there is not a full-service medical facility in the state in which the veteran resides, or the veteran was eligible for care in the community under the 40-mile rule in the Veterans Choice Program. There is also a responsibility for the VA to ensure its care providers are using “evidence-based guidelines” for prescribing opioid-based painkillers.

Ask Kit Kat: Feeding Hummingbirds

Hook Law Center: Kit Kat, what is appropriate to feed hummingbirds?

Kit Kat: Well, first of all, there are many types of hummingbirds. Bee hummingbirds are extremely tiny. They are the tiniest of hummingbirds. Rufous hummingbirds make very long migrations relative to other migratory birds. Anna’s hummingbirds fly faster than some space shuttles. So all in all, this is a very varied species.

With that said, if you happen to live in an area with hummingbirds, how can you encourage them to stay, and what should you offer to feed them? Experts say the best thing to provide hummingbirds is an environment rich with insects and flowers. Salvias, penstemons, monkeyflowers are excellent examples. In the past, it was thought that feeders containing sugar water was the way to go. However, scientists now realize that is probably the worst thing that can be done. One has said, “Feeders in landscapes with fewer insects are akin to fast-food drive-thrus doling out 32-ounce sodas and nothing else—a quick hit of energy but little substance.” Moreover, sugar water can go flat, especially in hot weather. If used, it should be changed often. Lisa Tell, of the UC Davis Hummingbird Health and Conservation Program, comments, “If you wouldn’t drink it, then it’s not great to offer them.” Also, feeders should not be placed too close to a window to prevent the birds from injuring themselves.

Hummingbirds are an important part of our ecosystem. They help to pollinate about 7,000 species from Alaska to Argentina. In turn, the plants they help to thrive, provide nourishment for mammals that we humans consume. It’s the circle of life—and we owe these tiny avians a great deal! (Nancy Lawson, “To feed or not to feed,” All Animals, March/April/May 2019, p. 30)

Posted on Thursday, June 6th, 2019. Filed under Senior Law News.
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Ask Kit Kat: Pet advice and wisdom as Kit Kat sees it.