Parents often make legal and estate planning mistakes because of a lack of accurate information and guidance. These mistakes can impact financial security and prevent them from achieving important goals.
It is wonderful to gift both from the giving and receiving point of view. As we age, gifts can have pitfalls, as well as joy, attached to them. People make gifts for many reasons including love and affection and the desire to assist another family member, people in need, or a charity. But be careful making gifts may have unintended consequences.
From a legal perspective, a gift is made when you transfer your money or property without receiving something of equivalent value in return. If you sell a property worth $100,000 to your child for $20,000, you have made a gift worth $80,000. For a gift to be complete, several legal requirements must be met: (1) you must intend to make a gift; (2) you must give up dominion and control over the gifted asset, and (3) the gift must be accepted by the recipient.
There are lots of ways to make gifts. They can be structured to take effect immediately with no strings attached, or they can be made to take effect at some point in the future or be made with restrictions.
There are many things you need to consider before making any substantial gift. An example:
When he dies, P wants his home to go to his son, R. P is concerned that R will have to pay income tax. P is also worried that if he gets sick and needs expensive care, he may lose the home to nursing home costs. He also wants to avoid probate although, in truth, he isn’t sure what that is, or why it is a worry.
P goes to an Elder Law attorney and tells him he wants to deed the home to R now. The lawyer says that he will be happy to prepare the deed, but asks if P has considered all the consequences. The lawyer explains that the house could be lost if R ever runs into financial or marital difficulties. And he asks what will happen to the home if R predeceases P. In addition, the lawyer explains that if the home is given to R and then sold, R will have to pay capital gains taxes that would have been avoided if P had died with the home in his estate. While inheritance taxes might be lessened, income taxes might be increased.
After talking with his lawyer and considering a number of options, P decided not to deed the home to R directly but to put it into a trust that will protect it from nursing home costs, capital gains taxes, and R’s future divorce or creditors.
And while gifting a property away may someday protect it from nursing home costs, making the gift can negatively impact the donor=s current eligibility for important Medicaid benefits for a period of five years. If you think you or your spouse may need long term care within the next five years, consult an experienced elder law attorney before making the gift. You should also think about the consequences the gift may have on the recipient. For example, will the gift impact the eligibility of a child or grandchild for college financial aid?
Here are some tips. Before you make a large gift, look carefully at your own personal situation. Are you in financial position to make the gift without jeopardizing your financial security? How does it affect your estate planning goals – for example, how will it impact your desire to treat your children with equality? Will you need to update your Will and beneficiary designations to compensate? And how will you feel if the recipient of your gift does something with it you didn’t contemplate?
Gifts involve income, estate, inheritance, and gift tax issues that should be reviewed in advance. More importantly, improperly making a gift could jeopardize your ability to obtain proper care when you need it and do not have the resources to pay for it. Often the cost is far higher to engage in seemingly simple transactions than to engage competent counsel to advise you of the various consequences of your well meaning, but not always well understood, transactions. After you have considered these issues, get some expert advice. An expert can help you decide whether a gift, and what kind of a gift, makes the most sense for you.