A Gift With Unintended Taxes Included!

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A Gift With Unintended Taxes Included!
Greg Walker

The best of intentions can go wrong when it comes to passing assets to your family. In an effort to keep things simple, many parents gift assets to their children during the parent’s lifetime rather than waiting for the assets to pass to their children after the parent’s death. In addition to keeping things simple, lifetime gifting allows parents to experience the joy of assisting their children when a need arises.  Unfortunately, parents are not aware of  significant tax and other consequences to both the parent and the child when assets are given away during the parent’s lifetime.

Real estate is an asset parents often gift to their children.  Parents want to help their children by gifting the family home, which has gotten too big for the aging or widowed parent. Another way parents help their children is by donating family land. By donating land, parents can help facilitate the building of a child’s first home.  Real estate donated to children is often a family asset like a vacation home or camp with hunting land which is given to the child to “keep it in the family.”  Commercial real estate is given to a child as an investment which can generate extra income and future wealth. 

Another asset parents often gift to their children is stock.  Parents may want to give a child or grandchild stock to start an investment portfolio or to simply pass down an investment that has been in the family for years.  If the parent already has a comfortable retirement, the dividends from the donated stock can help the children in these times of uncertainty and increasing costs.

Both real estate and stock can become more valuable over time. While gaining value is a good thing,  it is this increase in value that contributes to the first consequence of parents gifting assets during their lifetime.  When you give assets to your children during your lifetime, your children receive your assets with your “basis” in the asset. Your basis is what you paid for the asset. Thus, if your child sells the asset for more than you paid for it, they will owe capital gains taxes on the increase in value from your original purchase price.  This can be a significant tax.  However, if you pass assets to your children through a will, certain types of trusts  or using other planning strategies, your children can receive the asset with a “stepped up basis” at your death.  This means that your child will receive the asset with a basis equal to its increased value at the time of your death, not your original purchase price. Then, if your child later decides to sell the asset, there will not be a significant increase in value to be taxed on.  This “step up in basis” at death is the subject of current tax code discussions in Congress. At least for 2011 and 2012, the step up in basis at death remains in effect.  However, the fate of the stepped up basis at death in 2013 and beyond is unclear.  This uncertainty makes proper planning to achieve the best possible tax strategy even more important before passing assets to your children.

Another unintended consequence of parents lifetime gifting is a child’s potential divorce or bad spending habits. A local couple gifted land to their daughter several years ago so she and their son-in-law could build a home next door. Unfortunately, the parents recently watched as the home was foreclosed on by the bank. Now, the parents have strangers living next door on what had been their land before being gifted to the daughter.

What seems like a simple plan to transfer assets to your children by adding the child’s name to a deed or account, or by giving assets to them outright, can have disastrous tax and other unintended consequences. However, with proper planning, parents can “gift now” with both advantageous tax results and added protections.

Greg Walker is an attorney located at the Estate Planning Center in Alexandria. To learn what kind of planning will support your family’s needs, contact an attorney with the Estate Planning Law Center at (318) 445-4516 to schedule a free, no obligation consultation.