Gifting assets to avoid estate taxes is one of the most basic, age-old tricks to estate planning and the strategy has many, many proponents. But this approach–like many strategies to avoid taxation–isn’t nearly as simple nor foolproof as it appears on its face. Like a lot of dodgy advice, this “easy trick” is handed down through the ages by those with very little knowledge of the area. If not handled properly and at the right time, that gift may very well create an array of unforeseen problems for both you and the unfortunate recipient of your gift!
Want to protect those you love? Ask these five questions before tying the bow on that proverbial gift box:
Why is the gift being made? I’m definitely not saying to avoid giving gifts to those you love. If your motivation stems entirely from simple generosity, that’s great! But using a gift as a means to transfer assets to achieve some estate planning goal can be hazardous. You will need to balance the benefits with a number of possible consequences. One example: five years of Medical Assistance ineligibility could be triggered by an improperly-handled gift–potentially complicating your long-term care expenses. Also, your gift may be subject to both Minnesota and Federal gift tax if not handled correctly. Give me a call or speak with your own personal lawyer to evaluate your options.
Are you keeping enough for your needs? Your gift shouldn’t reduce your ability to care for yourself in the years ahead. Make sure a gift of any real size is factored into your long-term financial planning.
Are you expecting repayment? If so, it’s not actually a gift. Nonetheless, if you are expecting repayment, does the recipient know that? If they aren’t made aware of the monetary expectations that come with the “gift”–ideally in the form of a clearly-worded promissory note–don’t look to the courts to decide in your favor when you seek repayment.
Are you expecting something else in return? Just like the above, it is highly risky to expect anything in return for a gift, particularly anything as essential as a place to live. It is often better to go a different route that will better fit your purposes–a trust, for example, places the gift entirely under your control until your passing (and beyond, if you wish to set requirements the recipient needs to fulfill). Another good option is a Transfer on Death Deed (TODD). If you are curious about this, I’ve written another article about why a Transfer on Death Deed is better than a Quit Claim Deed.
A pure gift, on the other hand, places the asset fully into the recipients legal control. If they don’t do what you want with it or, worse, your assets become trapped in a messy divorce or bankruptcy, you will have zero legal recourse.
Will the recipient benefit from your gift? If the gift is going to someone who has special needs and receives social services for those needs, any important benefits they receive could be barred to them if they receive the gift outright. Other issues–gambling, alcoholism, addiction, or just plain lack of financial common sense–could be made all the worse by an unconditional gift. Here, again, a trust will enable you to see that your assets are not squandered and, more importantly, be available to help your loved one put their lives on track in a safe and healthy way.
One of the best ways for you to gift assets is through a Wealth Creation Trust, which allows you to decide the best time for children or grandchildren to receive your gift and gives them the necessary time and experience to learn how to protect and grow the assets in the trust for future generations. It also can be structured so that additions to the trust are handled incrementally and in such a way to avoid gift taxes.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today at (612) 206-3701 or fill out our contact form to schedule a time for us to sit down and talk about this in a family estate planning consultation, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security.
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