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Path 2: Gift It All Away During Your Lifetime

Posted by Scott Schenking | Aug 11, 2021 | 0 Comments

In various forms gifting away your entire estate can seem a reasonable and rewarding option. 

You may have a very small estate and believe that simply gifting it now will prevent any issues later, or you have a larger estate and want to gift now to reduce estate taxes.  In either case, gifting will result in a total loss of control and may not provide the result you intended.

What control do you have?  None whatsoever.  After the property is given away you have lost any control over that property.   You are reliant on the donee to provide for you any support you may have thought due to you.  Not only may circumstances change to prevent this from realization, but there simply may exist a very real misunderstanding between the parties if the donor was expecting some future level of support in exchange for a gift during his/her lifetime.

Don't Lose Control Over Your Estate

What fees, costs, and commissions have you saved? Answer: There will be no probate and all the fees, costs, and commissions associated with probate will have been saved.

The obvious potential deal breaker here is the issue of control.

After the gifts have been made, the control over the allocation and distribution of your estate is completely in the hands of the donees of the gifts, and not you.

Some important points on gifting to consider:

  • To be a gift for tax, legal, and probate purposes it must be delivered during the lifetime of the donor to the donee. To do otherwise defeats the gift, invites litigation, and could trigger a probate.
  • In most circumstances the gifts must be made at least three years before the death of the donor or they may be included in the donor's taxable estate.
  • State and federal taxes, penalties, and interest may be due on the gifts.
  • The donee takes the gifted property at the tax basis of the donor (i.e. not what the gift is worth at the time it is given but what the donor paid for it plus what the donor may have invested in it). As a consequence, the donee may have to pay substantially more in capital gain taxes when he or she sells the property than if they acquired the property at the donor's death. At the donor's death there is a step-up basis in capital gains that alleviates this pitfall.

Again, once these facts are understood, the idea of gifting it all away should be shelved.

The client may have thought to reserve a life estate in the gifted property but if the donee subsequently sells the property, goes through a divorce, or goes through a bankruptcy, their landlord may not be the friendly donee the client presumed they would be at the time the gift was made!

Should the donor wish to refinance, take out a reverse mortgage, sell, exchange, or otherwise deal in the gifted property they cannot do so. After making the gift, the you have lost all control.

Gifting DOES significantly reduce the potential impact of estate taxes. This, and the fact that gifting the property away saves probate fees, costs and commissions, makes it an attractive idea as a part of an overall plan.

However, using gifting as an overall estate planning strategy fails because:

  1. you lose all control,
  2. probate may still result if the gifts are not perfected,
  3. the three year look back rule is still very much applicable to most gifts,
  4. state and federal gift taxes may be incurred,
  5. the donee takes the property at the donor's tax basis,
  6. if anything goes amiss with the donee, (i.e. a divorce or a bankruptcy), the owner of the gifted property may not be who you contemplated, and
  7. you cannot use the property as collateral for a loan, refinance it, take a reverse mortgage out on it, or otherwise deal with it.

About the Author

Scott Schenking

Scott is approved as a Certified Estate Planner by the National Institute for Certified Estate Planners. Scott received his Juris Doctor from the nationally ranked George Mason University Antonin Scalia School of Law in Arlington, Virginia.  Before beginning his own pra...

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