Sometimes people will transfer 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’s gone. You may think your children will give it back to you if you change your mind, but they don’t have to, and things can change in families when money is involved. They could sell the
asset against your wishes, they could 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 $11,000 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’s 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 receives a new steppedup basis, and is revalued as of the date of your death. Let’s look at an example. Let’s say you purchased your home for $20,000 and it’s worth $150,000 when you die. If your children receive it as an inheritance after you die, the basis would be $150,000. If they then sell it for
$150,000, there would be no gain and no capital gains tax. But if you give the house to them while you are living, the basis would be $20,000 (what you paid for it). If they sold it for $150,000, they would have a $130,000 capital gain and would have to pay $19,500 in capital gains tax. (Currently, the top capital gains rate on assets held longer than 12 months is 15%.)
Substantial gifts may also disqualify you from receiving Medicaid and SSI (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 professional.