Inter Vivos Gifts: Transferring Property or Wealth While You’re Still Alive

Stated simply, inter vivos gifts are those given by a donor to a beneficiary during the donor’s lifetime. Many families and individuals enjoy passing property or wealth on to loved ones, friends or charities in this manner. The term “inter vivos” is a Latin one that can be translated as “between living people.”

One of the chief reasons a donor makes this kind of gift is to help a beneficiary avoid paying unnecessary probate taxes after the donor passes away. Another motivation is to give the donor the personal pleasure of seeing the beneficiary enjoy the gift or funds. While other reasons may exist, those are among the most common ones.

The following material reviews some key legal terms you’ll want to know while working with your Houston estate planning attorney. There’s also a list of key factors required for a valid transfer of an inter vivos gift.

Legal terms often used when conveying wealth or property as inter vivos gifts 

  • Donor/grantor. Both these terms are used to describe the person making the inter vivos gift;
  • Beneficiary. The party designated as the recipient of the funds or property;
  • Settlor.  This term is often just used to refer to someone who creates a trust;
  • Advancement. When making a formal inter vivos gift, you should tell your lawyer if you want to treat a gift as an “advancement” against future gifts you’ve already designated for a beneficiary in your estate plan. That will mean that the value of the current gift will reduce the size or value of your later bequest to the specific beneficiary.  You can also just state that you do not want your current, inter vivos gift treated as an advancement against what you’ve designated for a person or group in your estate plan; 
  • Capital gains taxes. Keep in mind the tax consequences that can occur if you currently give someone an inter vivos gift like stock shares. For example, if you give someone an inter vivos gift of stock shares that originally cost you less than $3,000 – but are now worth over $10,000 — your beneficiary will likely have to pay a capital gains tax on that gift. To prevent this burden from being passed on to a beneficiary, you may just want to give the person cash to buy stock shares — or anything else they prefer;
  • Gift taxes. At present, every beneficiary who receives an inter vivos gift worth more than $15,000 must pay a gift tax on the amount to the IRS. Therefore, most people who give these gifts keep them under $15,000 for each recipient. You’ll need to ask your attorney what the limits are on the size of the inter vivos gifts that spouses may want to give each other.

Choosing to create a trust when transferring wealth as an inter vivos gift

Some grantors may not want to make direct cash or property gifts. Instead, they make want to make this type of gift by creating either a revocable or irrevocable trust. As may now be clear, these types of trusts take effect while the settlor is still alive. In contrast, testamentary trusts don’t take effect until the settlor dies.

Here’s additional information about both revocable and irrevocable inter vivos trusts.

  • The revocable inter vivos trust. This can go into effect (or become operative) during the settlor’s own lifetime. This type of trust can also be referred to as a living trust – one that is drafted so that it won’t have to go through the probate process;
  • The irrevocable inter vivos trust. This type of conveyance is designed to go into effect while the settlor is still alive. However, it cannot be revoked after the settlor has finalized it. People normally use this type of trust to help reduce the beneficiary’s potential tax debt.

Key information about making inter vivos gifts to minors

Since minors cannot receive large gifts of money or property directly, inter vivos gifts made to them require the use of a trust. A party must be named as the guardian of the trust to manage its contents (under court supervision) on behalf of the child – until s/he reaches the age of majority.

Conditions that must be met for a valid inter vivos gift to be made

  • The donor must have capacity. As a donor, you must be at least 18 years old when you make this type of gift;
  • The donor must have the proper intent. This requirement usually means that the donor intends for the gift to be transferred during his/her lifetime;
  • Receipt of the gift by the beneficiary. You must arrange a reliable form of delivery to the beneficiary. This means the donor/grantor (or settlor) will then no longer have control over the funds or other property;
  • Acceptance. The beneficiary must accept the gift. While most of us would readily accept an inter vivos from someone else – that’s not going to be true of everyone. In some cases, high taxes might be due on the gift — or the recipient may simply not want to accept any gift from the grantor or settlor.

Please feel free to contact one of our Murray Lobb attorneys with any questions you may have about making legal gifts to others for current delivery – or to be received later as part of your personal estate plan.

IRS Clarifies “Employee” Versus “Independent Contractor” Test

The IRS recently issued clarifying guidelines to help employers determine which workers should be treated as independent contractors or employees. The government naturally wants accurate decisions to be made since they determine when it’s paid certain taxes on each worker’s wages.

The main deductions that should be subtracted from all employees’ paychecks include those for Social Security, Medicare, unemployment and income taxes. When a business has work done by an independent contractor, that person must pay all those taxes in the form of self-employment tax.

What remains the general standard for deciding if a worker is an independent contractor?

If an employer reserves the right to only direct control over the result of the work – and cannot tell a worker exactly what to do and how to handle the assignment – then that worker will usually be legally viewed as an independent contractor.

However, deciding what constitutes specific directions for completing a given task can still fall into a gray area.

Fortunately, there are three basic analytic categories that can help employers accurately determine when workers are properly classified as “employees” or “independent contractors.”

What are the three main categories of analysis for deciding a worker’s correct status?

The IRS indicates that employers should carefully examine the following three aspects of how they relate to workers to determine their proper work status.

  1. Behavior control. An employer may have behavior control over a worker even when it does not exercise it. For example, when such control is involved, it may include telling a worker which specific tools to use and where those supplies should be purchased. Under those circumstances, the worker should be considered an employee. Conversely, the less control over a worker’s behavior, the greater the chance that the person is working as an independent contractor.

If there are strict guidelines for determining the quality of the work provided, there’s a strong chance that the worker is an employee. When the worker is provided a bit more leeway in terms of quality control – there’s a stronger chance that the person is an independent contractor.

Of course, the two parties will usually need to agree to some basic quality standards, regardless of whether the worker is an employee or independent contractor. Finally, if periodic training or ongoing training is required of a worker – that increases the chances that the worker should be treated as an employee.

  1. Financial control. Does the worker have to personally cover the majority (or all) of the expenses tied to completing the work? These might include the purchase and maintenance of proper computers, printers, fax machines, scanners and other required equipment. If the worker is covering all those expenses, he or she should probably be classified as an independent contractor.

Stated differently, when a worker has many unreimbursed expenses, that person is usually an independent contractor — not an employee. Independent contractors are also those who retain the right to continue obtaining additional work from other parties. As for the payment for services, independent contractors are usually paid a flat fee – although that arrangement can vary in some cases.

  1. How the employer and worker each perceive the nature of their relationship. When the parties have not negotiated any employee benefits like vacation pay, sick pay, a pension plan and stock options – the worker is usually an independent contractor. While a written contract signed by the two parties can indicate how they view their interactions, it’s not always the only evidence the IRS and the courts will review when classifying the work relationship. All relevant documents and communications may need to be examined.

The main consequence for an employer who misclassifies a worker is that the employer may be required to pay all employment taxes currently owing for that worker – as opposed to requiring the worker to cover them.

What unique emphasis is placed on these three categories in the updated guidelines?

As for behavior control, employers really shouldn’t be telling the independent contractor the exact sequence of events for all tasks to be performed or exactly how they should be handled.

Regarding financial control, only independent contractors can experience a profit or loss while handling assigned tasks. Employees whose expenses are generally covered will usually not experience any profit or loss while completing assigned tasks on a given schedule.

As for how the parties view their work relationship, a fully executed contract can be controlling when other conclusive details aren’t available. However, as briefly noted above, the parties’ communications can usually provide clear indications of whether they’re interacting as employer-employee or employer and independent contractor.

The key bottom line for employers who don’t want to only work with employees – is to allow their independent contractors considerable flexibility while completing tasks – while respecting professional standards acceptable to both parties.

Please give our law firm a call if you need any help determining which workers are employees or independent contractors. We can also help you better understand the many different types of classifications that govern a wide range of employees you may want to hire – and the tax consequences for hiring those who fit in each group.

Our firm always remains available to help you draft many different types of contracts that can serve all your business needs.