Did you know that giving someone a gift may have bad consequences? At Ness & Jett, LLC, we often meet with parents or grandparents who have decided to make a gift of a house, land, stocks, money, or other valuable assets to their child or grandchild, or even a non-relative. While well-intended, such gifts can have unwanted consequences. At Ness & Jett, LLC, we do not practice tax law, but we can advise you, and consult and collaborate with tax professionals, as needed, to assist you to carry out your generous wishes without harming your own interests. If you are considering such a gift, you may need to consider the following:
A gift made in one year, exceeding the federal annual gift tax exclusion ($14,000 for 2017), can trigger gift taxes for the giver, or may at least require the filing of a gift tax return. There are exemptions and solutions to deal with this issue, and we can collaborate with a tax professional to assist you in choosing the best course. Just a few of the options include:
Spreading the gift over multiple years: A gift of value exceeding the exclusion can be given in installments beginning in Year 1 and ending in a future year.
Teaming with a spouse to double the gift tax exclusion: A married couple can give up to twice the exclusion amount. If the asset is owned by one spouse, she can give her spouse an interest, and then both can make the desired gift, thus doubling the amount that can be passed in one year without tax consequences. For example, a married couple with a married child could give $56,000 in value into the child’s household, simply by making the gift in four parts, with each donor spouse making separate gifts to the child and child’s spouse.
Filing a gift tax return without paying tax: A return can be filed to apply the gift to the donor’s lifetime gift tax exemption (the estate value a person can pass to his heirs without estate taxes, which, for 2017, is $5.49 million). If the giver expects to have a nontaxable estate at her death, this is often a good solution.
Other transfers which are tax exempt include gifts to a spouse, certain gifts of tuition and medical expenses, and gifts to political organizations.
A gift of property likely to be sold in the recipient’s lifetime may eventually result in income tax which could be avoided. Example: Ninety year old grandfather gives to grandson land he has held for fifty years. Odds are good that the land is now worth much more than Granddad paid for it. If Grandson sells the land, his basis, used to calculate income tax on the sale, is Granddad’s long ago purchase price, and his income on the sale is the difference between that basis and the sale price. He will pay taxes on this amount. If, instead, Granddad holds the title to the land until his death, and left it to Grandson in his will, Grandson’s basis in the land is “stepped up” to the amount of the current market value at Granddad’s death, regardless of what Granddad paid for the land. Then, a sale for that value would be tax-free.
Many older persons believe that giving their house, lands, or other assets to their loved ones will assist them to become eligible for Medicaid assistance with nursing home or medical care, and will shield those assets from recovery by Medicaid after their deaths. This area is fraught with consequences, as Medicaid employs a five year “look back” analysis of assets when determining eligibility. Transfers to achieve Medicaid eligibility can be penalized. Giving away assets may leave the family with the dilemma of paying for nursing home care up to the value of the assets given away. Some Medicaid planning actions have been deemed unethical or even illegal.
We Can Help
Ness & Jett, LLC, can assist you in making your gift while avoiding financial perils to yourself. Give us a call today and schedule an appointment with one of our attorneys.