The Consequences of Gifting
Are there consequences for turning over assets to children?
One of the most common "catches" I find in conducting financial planning reviews involves raising client awareness of the potential pitfalls of gifts of real estate and/or appreciated securities. Recent examples include an elderly parent in declining health who turned over his house to his son to avoid probate and parents who added their two children to their joint ownership of two rental properties for estate planning purposes.
In both of these examples, the donors of the property were under the misperception that an ownership registration change offered a simple solution to the objective at hand. In both cases, the donors and the donees were unaware of the potential unintended tax and legal consequences of the ownership transfers. In the second case, neither the donors nor the donees were aware that adding a another person's name to the existing joint ownership registration constituted a legal proportional gift of the asset.
In neither case were the parties who were gifting or receiving appreciated securities or real estate aware that the donor's cost basis transfers to the donee. Thus, one BIG potential consequence is that capital gains tax may be due when/if the donee eventually sells the asset. In contrast, if the property is transferred through inheritance instead of through gifting via ownership registration change, the cost basis of the assets may be stepped up to the FMV at the date of death.
Additionally, many donors are unaware that transferring property ownership to children during their lifetimes may expose the property to litigation or divorce claims against the donee. Further, most donors are unaware of their legal obligation to file a gift tax return (IRS Form 709) documenting a gift of more than $15,000.
The importance of understanding the financial planning implications of ownership changes cannot be understated. FPH clients who are considering ownership changes to real estate or appreciated securities would do well to consult with their CPAs, attorneys, and me before effecting such changes. Supporting information may be found in the following articles -
Dangers of Giving Your Home to Your Children (Wall Street Journal)
Giving Your Home to Your Children Can Have Tax Consequences (Elder Law Answers)