Gifting Do’s & Don’ts: The Issues & Tax Consequences of Unplanned Lifetime Gifting

by Gregory Aler
After talking to their next neighbor, Mom and Dad decide to transfer their home to their Son in an effort to save on probate and estate taxes and to protect their house from future nursing home care costs. Unfortunately, Mom and Dad didn’t talk to an Estate Planning Attorney or CPA and now they could lose their house or be responsible for thousands in taxes.

Capital Gains Tax

The most commonly overlooked aspect of making lifetime gifts is the potentially adverse Capital Gains Tax consequences that go along with these types of transfers. Unfortunately, many people rely on bad advice and recklessly make gifts to family, friends or trusts without first talking to a CPA or estate planning attorney.

Basically, the Capital Gains Tax is payable to the Federal government on any asset that you own which has appreciated in value from the time you bought it until the time you sell it. This tax applies to all types of assets, including stocks, personal property, real property, etc. Gifting during your lifetime results in the recipient receiving your cost-basis (the amount you originally paid for the asset) when they eventually sell the asset, instead of getting the much preferred “stepped up” basis to the fair market value of such asset.

In our example above, if Mom and Dad originally paid $50,000 for their home and then transferred to their Son during their lifetime, the Son would inherit the $50,000 cost basis. If Son then sold the property for $250,000, he would likely pay a tax of 15% on the appreciated value, a sum of $30,000 (($250,000 – $50,000) * 15%)!!! This family’s Capital Gains exposure could have been easily reduced to ZERO if they would have taken the time to speak to a professional with experience in asset protection.

Gift Tax

Many individuals don’t realize that the Giftor (the person making the gift) is responsible for paying any gift tax liability in connection with the gifts he/she makes every year. The reality is that most people fail to file the appropriate Gift Tax paperwork with the IRS after making lifetime transfers to friends and family at the end of the taxable year. As of 2011, you my transfer up to $13,000 (personally) or $26,000 (per couple) to as many other individuals as you wish each year without exposing yourself to any Gift Tax liability. However, if any gift exceeds the previously mentioned thresholds, you may be subject to Gift Tax. In the scenario above, if the home transferred to the Son was worth $250,000, a Federal Gift Tax return would be required to be filed with the IRS because Mom and Dad exceeded their annual Gift Tax couple exemption of $26,000. The door has now been opened and they could be subject to additional tax liability on an asset which they no longer own.

Inherent Risks & Loss of Control

The LARGEST risk to gifting an asset for protection planning purposes isn’t tax exposure or a possible nursing home care expense. Instead, it is the inherent risks and loss of control of transferring ownership of an asset which you will depend on in the future to another person. Once the transfer is made, their problems are now your problems. These issues could include their bankruptcy, divorce, law suit(s) or unintended/unpermitted use of the transferred asset which is now owned by them, NOT YOU.

To highlight these issues, when Mom and Dad transfer their home to Son, it is their intention to continue to live in such home for the indefinite future. What happens if Son files for bankruptcy, gets a divorce or gets sued? Son’s problems are now Mom and Dad’s problems because Son is now the owner of the asset which means Mom and Dad could be looking for a place to live if Son is forced to sell the house. These risks can easily be avoided by utilizing some simple trust instruments to ensure protections against all of these dreadful scenarios.

People often fall for the many sneaky traps connected with lifetime gifting. Even experienced professionals can fail to spot these issues if their practice is not focused on gifting strategies. Before making a gift in haste to avoid probate, estate tax or nursing home costs, take a few minutes and talk to a professional who has experience and specializes in Asset Protection Planning. For more information about any of the information discussed, please attend one of our many FREE events all over the Greater Columbus area or contact us to schedule a COMPLIMENTARY one hour consultation at our office in Dublin, Ohio.

“A Lifetime Accumulating Wealth, An Afternoon Preserving It”