What’s the problem with giving away assets to my children?
Often when folks consider estate planning, especially long term care planning, the option of “giving away assets to my children” is high on the list because it is the cheapest option. But it is also the most expensive at the same time.
Let’s take a look at this.
The issue — often we need to transfer assets out of our name . . . .
Often in doing proper elder law/estate planning, we need to transfer assets out of our name and into the name of someone else or into a trust. So, naturally the idea comes up:
“I’ll just transfer my house to my kids”
“I’ll add my daughter to my checking account”
“I’ll gift this stock or investments to my son”
OK so what are the three issues with doing this option?
- Taxes.
- Creditors.
- Predators.
What are some of the tax implications to giving away assets to our kids?
A gift normally means the person receiving the gift gets the same “tax basis” as the original owner. Example is you bought your house for $100,000 and now it is worth $300,000. If you died and it passed by inheritance (or the right kind of trust) then your children would get a “step up” in tax basis to the fair market value which is $300,000. So they could sell it the next day and pay no taxes.
But if you give it away while you are living, then your kids take it at $100,000 basis and when they sell it for $300,000, they may be paying taxes on $200,000 in gains. Taxes can get complicated so get with your tax expert but hopefully this gives you a feel for how this “cheap” solution can be surprisingly very expensive.
What are the issues with creditors?
If you give assets to your kids, and they find themselves in a lawsuit situation with creditors, then the creditors can ultimately get the gift that you made. The fundamental rule of asset protection is whatever you can reach in and grab of your stuff, so can your creditors and predators. Same with your kids — whatever they own and control (and if they are a joint or sole owner then they own and control) their creditors have access to it.
So you give your house to your daughter.
Then her creditors can get it.
You give your son some of your investments and didn’t realize if he gets into financial trouble, his creditors can take the investments.
Probably not what you had in mind.
What are predators?
Predators include divorces, lawsuits (car wrecks, business deals, etc), your child having long term care needs, etc. A predator can reach whatever your child owns — and they don’t care what the “purpose” or intent was in giving the asset to your child. All that matters is your child owns it.
So you give a vacation home to your daughter and then she gets a divorce. Or gets sued for a car wreck.
You can’t say and she can’t say, “Well, this is really my mom’s. We just put it in my name to qualify her for certain benefits.”
Nope — if you really gave it away to her then she owns it.
If she owns it, then her predators can get to it.
So what to do?
There are options to transfer assets and avoid some or all of these issues. Some are fairly involved and some are not.
Some are cheaper (initially) than other options.
Just giving assets away, however, is rarely a good idea unless this is part of a well thought out plan.
We will be glad to talk with you in person (or by phone/video chat) to help you determine what your goals are and the best way to reach those goals — including how to properly and smartly transfer assets without running into the problems we outlined above.
If you have any questions about Estate Planning or Elder law (Medicaid, Special Needs, or VA Pension), feel free to give us a call at 205-879-2447 or contact us through our website.
John G. Watts
Watts & Herring, LLC
Birmingham and Madison Offices in Alabama
We represent consumers from all parts of Alabama