The Unintended Tax Consequences: Looking the Gift Horse in the Mouth

Gift of houseCreating plans that work is our top priority.

Who among us doesn’t love to receive gifts especially from a loved one? When we contemplating giving property of value that has appreciated since its purchase, the manner in which we gift could mean the difference between a large capital gains tax liability for the recipient or no tax at all. Simply put, the taxes due on the sale of an asset can be drastically different depending on how the asset is gifted.

Imagine parents decide to give their home to their son in order to protect this legacy from long-term care costs. Obviously, the child didn't pay for the home so it's considered a gift with parents obligated to file a gift tax although no gift tax will be due unless their estate is more than $10M+ . The more the property’s worth at the time of its sale by their son, the greater the gain and the larger the tax bill for him will be.

The reason for this tax treatment has to do with tax basis.  Your tax basis in any asset you own is essentially the purchase price. In the case of a house, any cost of repairs or improvements can increase your basis. The exception is that assets ‘step-up in basis’ to their fair market value at the death of the owner. By gifting the home during their lifetime, these parents unwittingly handed their son a capital gains tax bill along with the gift.  Son is probably not complaining about the tax but what if there is a better plan?

Had the parents have used a revocable trust to own the home or prepared a ‘transfer on death’ deed, son would inherit the residence with a full step up in basis at their death with the asset avoiding probate. However, the objective was to avoid having to ‘spend down’ the homes’ equity to pay for long-term care.  Therefore, their best plan would be either an irrevocable trust (more on that in a later article) or ‘a lady bird’ deed. This deed accomplishes all of their goals: it provides a step-up in basis at death; protects the asset from long-term care spend-down if drafted before care is required (5 years before); and, best of all, it provides protections that the parents may will not have known they needed. The deed preserves their right to live in the house for the rest of their lives without paying rent or sell it if need be and by delaying son’s ownership, the house to step up in basis at their death but the house is  protected from their son’s potential creditors, his divorce, even his decision to sell.

This is just one of the many ways our estate planning law firm helps families create a plan that works for their unique situation.  Call us for a complimentary consultation or  register for our complimentary seminars on this topic.

Reference: Fox 61 News (January 4, 2016) "Tips to avoid an income tax and estate planning time bomb"


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We've been putting together as many resources as possible so that we can continue to help:

  • If you’re a current client with a signing appointment or a prospective client with a consultation and would prefer that meeting take place in your own home, we can accomplish that with a little bit of pre-planning on our part and with the addition of a laptop, smartphone, tablet or other computer in your home to facilitate this virtual meeting. For those of you that need to sign legal documents, that too can be accomplished with the use of a webcam (FaceTime etc.), so that we can witness and electronically notarize all of your important legal documents.
  • We launched the rollout of our on-demand webinar early so that new clients and our allied professionals can view the important component parts of ‘an estate plan that works’ at their convenience.  That is available on our website.
  • Live video workshops will be produced as quickly as possible and certainly ahead of our previous schedule; we will keep you posted as these events become available. Given the ‘boutique’ nature of the firm, we rarely have more than ten people in our office including team members at any one time. During this period of ‘social distancing,’ we promise to have no more than 8 people at any time.   This allows us to comply with the Governor’s directive to limit in-person gatherings.
  • The best way to communicate with us is still by phone during regular office hours of 8:30 to 5:00, Monday through Friday, or, you can email any of our team members (that is, their first name followed by @zarembalaw.com).  We will respond to these emails as quickly as possible.
  • Please continue to follow the directives of our local, state, and federal agencies. For your health and in consideration of our team who is assisting you, if you’ve scheduled an office appointment or planned to drop off paperwork and are experiencing a fever, dry cough, or shortness of breath, please contact your primary care doctor for guidance and then our office to reschedule.

Thank you, Walt and the Zaremba Team

Update to our Process

The unprecedented coronavirus pandemic has taken our entire country by surprise. We understand how difficult this time is for America’s businesses and families.  However, we believe it is vitally important that we make every effort possible to continue to offer solutions that avoid disrupting our important partnership with you, your family and friends.  As you know, estate planning is not something that should wait for a more convenient time, therefore the opportunity to address your important goals both during and after this crisis should not wait.  To that end, we have added the option of a ‘virtual consultation’ to our office process.  You will now have a choice of either meeting with us in our office or in the comfort of your own home.