With the Christmas season it seems like a good time to talk about legal consequences of gifting. Of course I’m referring to gifting from an estate planning perspective. With the possible major changes coming in estate tax law, the estate tax implications may change but many other issues will remain the same and are largely misunderstood.
Why gift your assets? Estate tax was a large motivator but creditor and probate avoidance are still two common reasons to gift. It’s human nature after working your entire life to build some savings that you want to shield this from future risks and possible creditors. Parents also often want to help their children so that they don’t have to work as hard as you did. My first thought is that those savings are supposed to cover your unexpected expenses not those of your children.
I see many people transfer title on land or other assets to their children to “protect” the assets from the nursing home. Of course parents often fail to consider that their children might be a bigger risk. A divorce or other financial problems of your children will take these assets even if it’s really your asset. You can’t give it away and expect to retain control.
To guard against these risks, people try and retain control through trusts, life estates, leasebacks or other arrangements. In general, however, if you still retain control or use of the asset, the nursing home or other creditors can get at the asset as well. I can’t count how many people have come to our office for a review of their revocable trust and the client believes that this trust protects their assets from creditors. That’s simply false but who knows what promises were made during the sales pitch to complete a trust plan. Life estates used to be exempt from Medical Assistance recovery but that too no longer shields assets from recovery.
There are tax implications with gifting as well even with a repeal of the estate tax. First of all, many people are surprised that there is no income tax due from the donee upon receiving the gift. There is a potential future tax, however, as a donee assumes a donor’s basis in the asset. On the other hand, if you inherit at death, the basis steps up to current value. As an example, if your parents gift during life their hunting land you assume their basis (basically what your parents paid for the land) and then when you sell the land you will pay capital gains tax on the difference in that basis and the sales price. If you inherit on death that basis is today’s value so you could avoid a significant tax by not gifting during life.
The basic message is think before you gift. In general, you should only gift assets that you can afford to live without and don’t have any expectation that you can get these assets back if needed in the future.
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