- Asset Protection Planning
- Business Succession Planning
- Charitable Giving
- Disability and Special Needs
- Elder Law
- Executor and Trustee Responsibilities
- Financial Powers of Attorney
- Inheritance Planning
- Lifetime Gifts
- Medical Directives
- Planning for Minors
- Retirement Accounts
Giving Away Your Assets
Sometimes people will transfer the title of their assets to their adult children while they are living, thinking it will make things easier for their children when something happens to them. Doing this will prevent the court from controlling the assets if you become incapacitated and it will avoid probate when you die. And while there can be valid tax reasons to transfer some assets now, it can also create problems.
First, when you give away an asset, it is gone. You may think your children would give it back to you if you were to change your mind, but they do not have to. Things can change in families when money is involved. Your children could sell the asset against your wishes, lose it to creditors, or be influenced by a spouse. If you outlive your children or they divorce, a daughter- or son-in-law could end up owning the asset. Would she or he give it back to you?
Second, there could be tax problems. Currently, when you give someone other than your spouse more than $15,000 in one year, a gift tax may be involved. And when your children sell the asset, there will probably be a capital gains tax. That is because, under current law, the asset would not receive a stepped-up basis.
The basis of an asset is the value used to determine gain or loss for income tax purposes; in other words, 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). But if they receive it as an inheritance after you die, it may receive a new stepped-up basis as of the date of your death.
Let us look at an example. Say Jamal purchased his home back in 1955 for $50,000 and today it is worth $250,000. He gives it to his son Theo, who then sells it for $250,000. Because Jamal transferred title to Theo while he was living, the house keeps Jamal's original cost basis of $50,000. That means Theo has a $200,000 gain on the sale and under current tax law, he may have to pay up to $40,000 in capital gains tax. (As of 2020, the top capital gains rate on assets held longer than twelve months is 20 percent.)
Now, let us look at the other scenario. Theo receives the house as an inheritance after Jamal passes on instead of as a gift while Jamal 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 Jamal’s death, which is $250,000. Now when Theo sells the house for $250,000, there is no gain on the sale . . . and no capital gains tax to pay.
Substantial gifts may also disqualify you from receiving Medicaid and Supplemental Security Income benefits for a significant period of time.
Gifting can be a great way to reduce estate taxes if your estate is larger and you can afford to give away an asset. But never give away an asset you may need later, and make sure you consult with an experienced estate planning attorney to determine if lifetime gifting is appropriate for your situation.