Gifts as advance on inheritance

May someone make a gift (up to $12K) to a beneficiary of his will (a fixed amount) with the agreement to lower the beneficiary's inheritance by the amount of the gift? In
effect, it would be giving an advance on the inheritance. This would (1) let the beneficiary have some of the money sooner, (2) reduce the basis of the estate tax (unless such a gift doesn't get the $12K exemption). Is this permissible? Thanks. -- Earl Kiosterud www.smokeylake.com
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Those are two separate things.
1. He may make a gift of up to $12K without tax consequences to anybody, including a beneficiary.
2. He may amend his will to reduce the amount a beneficiary gets by any amount he wants, whether or not there's a gift made.
Seth
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If you give the money away it won't be in the estate to be taxed, which is very reason that many folks make such gifts; to reduce the value of the estate so that it will taxed less. As far as structuring your will to take the gifts into account and reduce the otherwise inheritance is more of a legal question about wills and inheritance rather than a tax question and would probably get better response in a legal newsgroup (misc.legal.moderated). It would probably help to say where you are located as probate laws vary State to State. My guess, (I am not an attorney) is you could structure a will to give a person a given sum should you die on year 1 and decrease that amount by $12K each year you live after that, ending up at zero should you live long enough. -- -Ernie-
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You could do that. You could even have a provision in a will that says that any gifts you have given any of your heirs (or gifts over a certan threshhold) are to be deducted from that child's share of the estate. The only problem will be determining what gifts there were and which are to be deducted from a beneficiary's share. Stu
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Sure. The only will that counts is the last one. The fact that you intended to leave a bequest to this person doesn't alter the tax-exempt gift rule. -- Phil Marti Clarksburg, MD
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snipped-for-privacy@nowhere.com (EarlKiosterud) posted:

In fact, one can make a gift of $12K or less to any person, with no reporting necessary, in 2007. However, the specification that this is part of an "agreement" might suggest there is collusion in an attempt to evade estate taxes. Might be better if you just forgot the idea of making your gifts related to "advances" on an inheritance, and view them as outright gifts to those you love. If, in your own mind, you occasionally adjust the allocations of your wills and/or trusts, because of an individual's "worthiness" based on whatever arbitrary basis you decide upon (including how much they've "dinged" you for while you were alive) ... well that's between you, your God and your family. Bill
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How does that differ from the non-collusion method of avoiding (not evading) estate taxes, by giving $12,000 to each beneficiary yearly? I don't see where collusion enters into anything. Seth
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It's possible. But don't do it just by agreement - it may not hold up legally. State your intention in your will or trust. Stu
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I need to add this. The idea is not to have to change the will -- just get agreement from the beneficiary and leave the will as is.
-- Earl Kiosterud www.smokeylake.com
Moderator: I am not an attorney, but this sounds like a codicil that can be added to the will without an agreement from the beneficiary. At worst, if the gifter dies within three years (I believe) of the gift, the gift will be added back into the estate. Otherwise I see no tax ramifications. Talk to your attorney.
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Yes a provision can be made in a will or codicile to do just what the OP wants, without having to get the agreement of any beneficiary. Stu
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The benefactor is in ill health, no longer able to make decisions. It's not certain how long he will live. There are power of attorneys (financial) who want to start doling out money to the beneficiaries, $12K per year. They can't change the will. They'd like to get the beneficiaries to agree to a reduced settlement, as a function the gifts that have been made. The total benefit would be the same, but some would arrive early. Will the IRS accept this? Also, the enforceablilty of such an agreement is an issue, and off-topic in this forum, but perhaps someone could also comment on that. -- Earl Kiosterud www.smokeylake.com
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In that case he probably has no legal capacity to make gifts, either. Normally a power of attorney or trust does not give the power to make gifts for someone else unless it's stated explicitly and clearly.

I don't see how it matters what the IRS thinks in this situation, unless it somehow reduces the total taxes due. And if that happens and there is no explicity authority to make gifts on his behalf, they will only care about the extra tax, not the gifts themselves.

I imagine that the agreement would be enforceable - it's really up to the probate judge if anybody challenges it. But since pre-death gifts in this case are not likely to be legally valid, I doubt it makes much of a difference. Stu
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The Power of Attorney document specifically gives them authority to make gifts that the benefactor would "reasonably expected to give" I think was the wording. Since they're in his will, this seems reasonable. This is to start giving them the money sooner, but no more total money. It could be argued that he'd have done this (give the gifts and reduce the benefit) had he remained in good mental condition. The gifts would reduce the estate tax, as they'd reduce the size of his estate, which is greater than the exclusion amount ($2 Million for 2007 and 2008), and would still be after the gifts were made. So the question is could/would the IRS regard this as an improper way to reduce the estate tax. -- Earl Kiosterud www.smokeylake.com
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If he never made such gifts before, there's a good chance a court would determine that they are not gifts he "would have" made. Again, it depends on local law and exactly how the power of attorney is drafted. In general a power of attorney does not give someone the power to act as trustee of a trust. So if the property is in the trust and it's the power of attorney that has the gifting clause, not the trust, that is another possible source of trouble.

It's not improper if the gifts are legal exercises of the power of attorney. Assuming the gifting scheme is legal (without knowing more I'd say it's about 50/50 based on what you've said) an agreement such as you suggest would likely be enforceable. But with the amount of money you are talking about, it makes good sense to talk to a local lawyer who can look at the actual documents and check state law as it applies to your precise facts. Stu
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Stuart,
Thank you for the information.
-- Earl Kiosterud www.smokeylake.com
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That opens a huge can of worms. It will be much cheaper to execute a codicil to your will reducing this person's bequest by the amount of the gift. -- Phil Marti Clarksburg, MD
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