On many occasions I hear from clients and potential clients that they have given certain assets to their children based on advice from someone with claimed experience/expertise in estate planning; on many occasions, the reasons given are to protect the parent’s assets and to save money. But transferring assets to children is not that simple and has many risks you may not be aware of that can fail to protect the asset(s) and cost more money in the long run (saving a $1,000 legal bill but incurring $27,000+ more in income taxes down the road).
First, transferring assets can trigger a gift tax filing requirement. There is no longer a state gift tax or gift tax return filing requirement in Tennessee (repealed Jan. 1, 2012), but the federal government’s gift tax filing requirement remains. The bottom line is if you transfer more than $14,000 in 2015 or 2016, the IRS requires that you file a gift tax return, Form 709. Even though no gift tax will be due (unless the total of your lifetime taxable gifts exceeds the $5.43 million lifetime estate tax exemption for 2015/$5.45 million for 2016), the Form 709 must be filed so the IRS can track the gifts you have made over the course of your lifetime.
Second, a gift made to a Child during Parent’s lifetime carries over Parent’s basis, which may have a major tax impact when the Child sells the property. For example, if Parent transfers a piece of real estate (purchased in 1980 for $20,000) to Child during 2015 while Parent is still living, Child’s basis for income tax purposes is the same as Parent’s, $20,000. Parent would also be required to file a gift tax return Form 709 (and may have to pay a professional to prepare and file the return). If Child sells the real estate in 2016 for the fair market value (we’ll use an even $200,000 for this example), Child will be taxed by the IRS on the $180,000 gain, which may result in an increased income tax (likely capital gains) to Child of up to $36,000 (using a 20% capital gains tax rate; increased tax would be $27,000 if the capital gains tax rate for Child was only 15%). This increased tax could have been avoided altogether if Parent has simply waited to transfer the property at death (Child would have received a basis stepped up to the fair market value on Parent’s date of death).
Third, I hear all the time from clients who are in the Parent role that their children are good boys and girls and will use the assets for the Parent’s benefit during Parent’s life. And this is often true, but in this situation the Parent has subjected his/her assets to the Child’s creditors, who could seek to recover debts owed by Child out of the property transferred by Parent to Child. Or another common situation, what if Child should die unexpectedly in a car accident or from an unexpected illness/cancer? In that scenario, the Parent’s assets could be under the control of their daughter-in-law or son-in-law (or whomever the Child designated in his/her estate planning documents) who may or may not have as good of a working relationship with Parent.
These are just 3 simple reasons not to give it all away. A fourth reason that should always be considered is Medicaid (which would require more than a simple blog entry to cover all effects gifting of assets may have on eligibility). Gifts during one’s lifetime can negatively affect one’s eligibility for Medicaid, and anyone who may need Medicaid should not simply give away all of their assets in an attempt to remove those assets from Medicaid’s reach. All gifts of assets should be carefully reviewed with your estate planning attorney so that a well-informed decision can be made with the full understanding of all consequences prior to making the gift or better yet, a more informed estate plan can be prepared to accomplish a Parent’s goals to get assets in a Child’s hands while reducing any tax liabilities to the Child and ensuring the Parent has access to his/her assets, if needed, for the remainder of Parent’s lifetime.
If you would like to speak to Kevin Dean on this or any other subject, he may be reached at (865) 546-9321.
Kevin Dean practices in the areas of Probate, Estate Planning, Bankruptcy, Business Litigation, Real Estate Litigation, Media Law, General Civil Litigation and Tax Law, including preparation of tax returns. As a licensed CPA, his combined background in accountancy and law ensure clients extensive, knowledgeable representation that is customized for each individual case. Kevin has appeared in numerous levels of state court and is licensed to practice in the U.S. Federal District Court for the Eastern District of Tennessee and the U.S. Tax Court. He enjoys using his merged backgrounds to help businesses and individuals analyze their situations. Kevin brings a highly beneficial skill set to the table for all his clients.
