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Consequences of Making Lifetime Gifts

By Howard C. Stross
December 22, 2014

As part of your year-end planning, you may be considering making some significant gifts. This is the second article in a two part series. The first article discussed the positives of making lifetime gifts. You should also consider the consequences of making lifetime gifts now verses your beneficiaries receiving gifts after you have passed away.

File Gift Tax Returns

In 2014, you may gift up to $14,000 per person per calendar year. However, if you give over $14,000 to one person in a single year, you are required to file a gift tax return. This would be a consequence for gifting your house to your children now (or even just adding them to the deed). By doing so, you have gifted either all or part of the value of the home to them. As most homes are worth more than $14,000, you are required file a federal gift tax return.

Running Out of Money

One major concern about making lifetime gifts is making sure that you have enough money to care for yourself for the rest of your life. People are living longer. According to AARP, 70% of all Americans age 65 and older will need some type of long term care. If you do not have long-term care insurance, you need to rely on your own funds. If you think that you will not have enough money and may need to apply for Medicaid in the future, you should stop making lifetime gifts. Unlike the IRS, there is no allowed amount. Therefore, making a $5,000 gift to each of your children would not require you to file a federal gift tax return. However, the same gift may disqualify you for Medicaid benefits in the future.

Increased Property Taxes

There are serious property tax consequences for gifting your house to your children now. If you don’t own your home anymore, property taxes will likely increase because you will lose your homestead tax exemption, senior tax exemption, and widow’s tax exemption. Even just adding someone as a joint owner can increase your property taxes because the 3% Save Our Homes cap may be reassessed.

Capital Gains and Basis Implications

Many times people want transfer real estate to children during their lifetime in trying to avoid probate.  However, for a recipient of such lifetime gift, there could be disastrous income tax results.

Taxpayers who receive property by a lifetime gift take original owner’s basis, while beneficiaries who receive assets at the decedent’s death get a step up in basis to the date of death value of such assets received. Consider the following examples:

  • Mr. Jones wants to avoid probate. He doesn’t talk to an attorney and transfers by quit-claim deed his real estate to his son. Mr. Jones bought his house in the 1970s for $40,000. Mr. Jones’ basis in the property is $40,000. When he receives the gift, his son takes a carryover basis for the house of $40,000. His son sells the house for $340,000 shortly afterwards. His son has a capital gain of $300,000 which he surprisingly finds out will cost him $60,000 in taxes (20% x $300,000).
  • In an alternate universe, Mr. Jones consults with his estate planning attorney who drafts a will that transfers the house to son at death. When he passes away, his son has a step up in basis to the date of death value of $340,000. His son sells the house for $340,000 and has zero, capital gain (Sale price of $340,000 less basis of $340,000 = 0)!

The above is not an exhaustive list of the consequences of making lifetime gifts. This article is for general information only and is not intended to provide tax, accounting or legal advice. The facts of your situation are unique. If you are considering making lifetime gifts, we want you to consider the positives and the negatives in order to make an informed decision. Call us at 813-852-6500 to schedule a free consultation.

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