As more and more of our aged Arizonans approach the twilight years, they also are looking for simple and efficient ways to transfer their wealth. At the same time, medical science is doing wonders for the physical health of aged folks, but that is not necessarily synonymous with their cognitive and mental health.
What happens when a parent’s physical health remains strong, while their cognition begins to fade? A common but often dangerous practice is to start transferring assets out of the name of the elderly person and into the name of children or younger family members or friends. Such a practice can result in disastrous consequences for an estate plan. In order to avoid those potential disasters, it is strongly advisable to consult with a competent lawyer before taking those steps.
Many individuals take the initiative to consult with an attorney before such gifts take place. This is ideal to prevent gifts from causing irreversible harm to both the donor of the gift and the recipient of the gift. Below are some common scenarios where an ounce of prevention would save a ton of regret:
1 – Potential violation of Arizona’s vulnerable adult statute. When individuals with cognition impairment consider making gifts, it is not necessarily a situation where gifts are conclusively prohibited. The persons that have close relationships with such individuals, usually their immediate family members or fiduciaries, are held to a higher standard when gifts start flowing their direction. If the gifting is not done for a proper purpose and with the proper formalities, the recipient of the gift may be liable for exploitation of a vulnerable adult. Three bad things can happen to the recipient, in addition to having to return the funds to the status quo: (1) there are criminal penalties similar to theft; (2) the recipient could be liable to pay back 3 times as much as was received; and (3) if the recipient happens to be an heir or beneficiary of the donor’s estate plan, then the recipient could be completely disinherited through the judicial process. On top of those penalties, such individuals can be held liable for the costs and attorneys’ fees required to recover those funds.
2 – Potential disqualification from receiving government benefits if the donor needs long-term care benefits or government health insurance benefits. Gifts made in order to qualify for government benefits can be appropriate if they are done properly. When there is a diagnosis of cognitive impairment or other disability, individuals often make gifts in “panic mode” to try to protect their assets from being depleted by the high cost of health insurance and long term care. The government is probably the least desirable legal adversary, having unlimited resources, and the ability to deny benefits procedurally. The advice of competent counsel is critical in this area as well to ensure that disqualification does not occur.
3 – Potential adverse gift tax consequences. For individuals who experience cognitive decline, the gifting rules generally are one of the furthest things from their mind. Certain kinds of gifting can take place without being reported to the IRS, but to avoid gifting disasters, it is again imperative to consult with competent counsel to avoid penalties and interest, and to use the gifting rules as an ally, and not as an obstacle.
Gifting done improperly when an individual has cognitive impairment is a time bomb. Such gifts often are done behind closed doors in an attempt to keep those transactions from coming to the attention of government agencies or of other family members. When gifting is done improperly, it is only a matter of time until discovery of the gifts, and then the consequences often are explosive. If you have any gifting questions, please contact the experienced Estate Planning Attorneys at Dana Law Firm.