I recently had the opportunity to speak with a client on whether they should make gifts to their children and loved ones now, or at death through their will or trust. As I explain to many clients, I cautioned this client that gifting assets to children and loved ones can have many unintended consequences.
Creates Unnecessary Gift Tax, Capital Gains Tax, and Estate Tax Issues - When you make a gift to an adult child or anyone else, that person is receiving a carry over tax basis. For example, let's say you buy a piece of real estate in 1940 for $20,000 and today it is worth $200,000. When you give this property away to someone else, the person receives your carry over tax basis of $20,000 and when the person sells the property, they will have to pay capital gains on the $180,000 gain. However, when property passes at death, the person who received the asset at death receives a step up in tax basis. Using the same example above, instead of having a tax basis of $20,000, the person has a tax basis of $200,000 and when they sell the property, the capital gains taxes will be the difference between the date of death value ($200,000) and the sale value of the property.
You Are Making a Taxable Gift - When you make a gift to anyone during your lifetime that exceeds $14,000 (or $28,000 of jointly held assets that you hold with a spouse), you have a taxable event that requires a gift tax return. In addition, if you fail to file your gift tax return on time, there may be penalties associated with your late filing.
Using Joint Accounts to Make Gifts - I hear this one a lot, and it is usually a terrible idea subject to only a few limited circumstances. When you use joint accounts, albeit innocently and in an effort to make things easier for your children upon your death and/or incapacity, you are in fact usually making things a lot worse. First, when you use joint accounts, you are making a taxable gift (we already went over the issues with making gifts during your lifetime above). Second, you are subjecting your assets to the creditor problems of the joint owner. Unfortunately, I have had the opportunity on several occasions to represent clients who put their adult children as joint owners on their accounts, and then their accounts were used to satisfy legal judgments from creditors of their adult children joint owners. Finally, it can foul up estate planning. We recently had the opportunity to represent a client who has passed away with a Will leaving everything equally to her two children. However, a sizeable bank account existed that was held jointly with her daughter. This caused a major concern and issue with her son (who was also executor) of her will. Ultimately, this issue had to be resolved in court - an expense that I am sure this client would have wanted to avoid (as well as the damaged family relationships)!
If I Have Said It Once, I Have Said It a Thousand Times - Joint Accounts Used as an Alternative to Proper Estate Planning Will Usually End Up Being Very, Very Expensive!
Make Sure You Receive Good Legal Advice Before Implementing Any Estate Planning Legal Strategy!
If You Have Questions, Call Us at (615) 370-3010 to Schedule an Initial In Office Consultation With Our Estate Planning Attorneys!