Can I Just Give It to Them Now? Risks of Transferring Property to Your Heirs Ahead of Time

Sometimes people will transfer title of their assets to their adult children while they are living, thinking it will make things easier for their children (I.E. To avoid probate, etc.). While doing this can solve some problems, there are substantial complications that can make the situation far worse.

How Can a Gift Be Given Too Soon?

Too Soon?

First, when you give away an asset, it’s gone. You may think your children will give it back to you if you change your mind, but they don’t have to…and let’s be honest, circumstances can change in families when money is involved. They could sell the asset against your wishes, they could lose it to creditors or they could be influenced by a spouse. If you outlive your children or they divorce, an ex-spouse could end up owning the asset. Would she or he be willing to give it back to you? Unlikely.

It's Mine! You Gave It Away! Grrr!

For Example: Mr. & Mrs. Jones gift their property to their daughter, Jamie. A couple of years pass, and Jamie is getting divorced and facing losing the home that she and the kids are used to. She decides to allow her parents’ home into the marital estate so that she can keep the one she wants… Now her ex-husband owns Mr. and Mrs. Jones’ home. Not good.

Second, there could be tax problems. Currently, when you give someone other than your spouse more than $19,000 in one year, a gift tax may be involved. Also, when your children sell the asset, there will probably be a capital gains tax. Without even knowing it, under current law, early transfers will lose the stepped-up tax basis that they would have received if it were inherited upon your death.

(Deeper Explanation: The basis of an asset is the value used to determine gain or loss for income tax purposes. Most of the time, the basis is what you paid for the asset. If you give an appreciated asset to your children while you are living, it keeps your old basis (what you paid for it.) However, if they receive the asset as an inheritance after you die, it should qualify for a stepped-up basis as of the date of your death…meaning that the basis will now equal the value of the asset so there’s no capital gains tax due upon sale.)

Where's my cut?

For Example: Let’s say Bob purchased his home for $100,000, and today it’s worth $350,000. He gives it to his son Tom, who then sells it for $350,000. Because Bob transferred title to Tom while he was living, the house keeps Bob’s original cost basis of $100,000. That means Tom has a $250,000 gain on the sale and under current tax law; he has to pay roughly $50,000 in capital gains tax. Currently, the federal capital gains tax rate for this type of asset is 20% (State could add more). Depending on Tom’s other income and filing status, he may also have to pay additional taxes – possibly equaling another $9 or $10,000 of tax. Ouch!

Now, let’s look at the other scenario. Tom receives the house as an inheritance after Bob dies instead of as a gift while Bob was living. Because it is received as an inheritance instead of as a gift, the property receives a new stepped-up basis to the market value as of the date of Bob’s death, which is $350,000. Now when Tom sells the house for $350,000, there is no gain on the sale…and no capital gains tax (or Net Investment Income Tax, etc.) to pay. Nice!

Third, substantial gifts may disqualify the giver from receiving governmental aid such as Medicaid and Supplemental Security Income benefits for a significant period of time. This can create enormous burdens for the family if long-term care is required and there are not sufficient assets to pay for it. For instance, nursing home type care typically costs between $10-15,000 a month!!! Medicaid can pay for that, but not if there’s been a substantial gift within the proscribed gifting period.

You Never Know

Lastly, while gifting can be a great way to reduce estate taxes if your estate is larger and you can afford to give away an asset, it’s not good for every situation. A good rule of thumb is to never give away an asset you may need later and never make a gift that will carry with it unforeseen consequences. Be careful to consult with an experienced professional before making those gifts.

Curry Andrews, Attorney