People often make legal and estate planning mistakes because of a lack of accurate information and guidance. These mistakes can impact your financial security and prevent you from achieving important goals.
It is wonderful to gift both from the giving and receiving point of view. As we age, gifts can have pitfalls, as well as joy, attached to them. People make gifts for many reasons including love and affection and the desire to assist another family member, people in need or a charity. Be careful when making gifts because they may have unintended consequences.
From a legal perspective, a gift is made when you transfer your money or property without receiving something of equivalent value in return. If you sell a property worth $100,000 to your child for $20,000, you have made a gift worth $80,000.
Legal requirements for a gift to be complete:
• Donor must intend to make a gift.
• Donor must give up dominion and control over the gifted asset.
• The gift must be accepted by the recipient.
There are multiple ways to make gifts. They can be structured to take effect immediately with no strings attached. Or, they can be made to take effect at some point in the future or be made with restrictions.
The following story highlights some things to consider before making a substantial gift.
When he dies, Dad wants his home to go to his son, Paul. Dad is concerned that Paul will have to pay income tax. Dad is also worried that if he gets sick and needs expensive care, he may lose the home to nursing home costs. Dad also wants to avoid probate although, in truth, he is not sure what that is or why it is a worry to him.
Dad goes to an Elder Law attorney and tells him he wants to deed the home to Paul now. The lawyer says that he will be happy to prepare the deed. Then he asks Dad if he has considered all the consequences. The lawyer explains that the house could be lost if Paul ever runs into financial or marital difficulties. He asks what will happen to the home if Paul predeceases Dad. In addition, the lawyer explains that if the home is given to Paul and then sold, Paul will have to pay capital gains taxes that would have been avoided if Dad had died with the home in his estate. While inheritance taxes might be lessened, income taxes might be increased.
After talking with his lawyer and considering various options, Dad decided not to deed the home to Paul directly. Rather, Dad decided to put the home into a trust that will protect it from nursing home costs and capital gains taxes. Ultimately Dad’s home is now protected from Paul’s future divorce or creditors.
It is important to consider the consequences the gift may have on the recipient. For example, it is crucial to find out whether the gift will impact the eligibility of a child or grandchild for financial aid for college. While gifting a property away may someday protect it from nursing home costs, making the gift can negatively impact the donor’s current eligibility for important Medicaid benefits for a period of five years.
If you think you or your spouse may need long term care in the future, consult an experienced Elder Law Firm, Slutsky Elder Law for a consultation before making gifts. Call 610-940-0650 for an appointment.