Lifetime Gifting
Making gifts during lifetime may have great advantages, including seeing the recipients benefit and appreciate gifts made. However, it's important to be aware that there are also disadvantages that should be considered before deciding whether making significant lifetime gifts is appropriate in your situation.
Advantages of lifetime gifting include:
• Satisfaction of seeing recipients benefit from and enjoy gifts made
• Simplification of life, with fewer assets to manage
• Lower annual income tax if income generating assets are gifted
• Potential protection of assets from future expenses, although it's IMPERATIVE to understand the implications of gifts on future eligibility for government benefits. (See Disability Considerations)
• Probate avoidance
• Potential estate tax savings. However, on the federal level, in 2023 federal estate tax only applies to estates exceeding $12.92 million. With planning, a married couple can avoid federal estate tax on up to $25.84 million. On January 1, 2026 estate tax exclusions are set to go back to $5-7 million per person depending on inflation. In 2023, gifts of up to $17,000 per person per year may be made with no gift tax ramifications, but even gifts in excess of $17,000 annually simply reduce the federal estate tax exclusion.
Disadvantages of lifetime gifting include:
. Loss of control of assets and personal financial risk -- Some families consider gifting to children, with the informal understanding that the children will, in turn, return income and/or assets to parents if needed. This plan can backfire in many ways. First, if a child has financial issues, goes through a divorce or encounters other financial hardship, assets may be depleted and not be available for anyone. If a child predeceases the parent, unless that child's estate plan protects the parent, assets may be lost. And - if no legal obligation exists, the child may simply have a change of heart, or may interpret any informal agreement differently than the parent anticipated.
• Emotional aspects of losing control of assets should not be underestimated. It's difficult to project life expectancy or what capital may be needed throughout lifetime. Relinquishing control of assets may create stress and loss of financial independence and can change family dynamics. Prior to gifting, be certain that without those assets, long term financial security is still intact. Not only will assets be gone, but income generated by those assets will also be gone.
• Capital Gains Tax Disadvantage -- If appreciated assets are gifted, your original tax basis is retained by the donee, and if that asset is sold, capital gains tax will be due. If the asset is inherited, the beneficiary inherits the asset with a tax basis equal to the value on the date of death, so capital gains tax is ONLY due on appreciation after the date of death. This can be a HUGE disadvantage when highly appreciated assets are being transferred.
• Medicaid risk -- Eligibility rules for government benefits are becoming more and more stringent. Gifting may have grave ramifications, including ineligibility for Medicaid, even if assets are no longer accessible because a donee no longer has them or is unwilling to return them. Additionally, even if eligibility is achieved, locating providers who will accept Medicaid patients is becoming more and more difficult. There may be individuals who qualify for Medicaid, but simply cannot find physicians or nursing homes who are willing to provide service.
• Loss of homestead credit, exclusion from tax on sale of personal residence and other income tax issues -- If you no longer own your home due to lifetime gifting, various income tax advantages may be compromised.
Gifting may be beneficial provided all negatives are acknowledged and understood, and your situation allows you to comfortably and safely make gifts. If this is the case, before finalizing gifts, a close analysis of tax benefits and detriments should be completed before deciding when, how and which assets to gift.
Advantages of lifetime gifting include:
• Satisfaction of seeing recipients benefit from and enjoy gifts made
• Simplification of life, with fewer assets to manage
• Lower annual income tax if income generating assets are gifted
• Potential protection of assets from future expenses, although it's IMPERATIVE to understand the implications of gifts on future eligibility for government benefits. (See Disability Considerations)
• Probate avoidance
• Potential estate tax savings. However, on the federal level, in 2023 federal estate tax only applies to estates exceeding $12.92 million. With planning, a married couple can avoid federal estate tax on up to $25.84 million. On January 1, 2026 estate tax exclusions are set to go back to $5-7 million per person depending on inflation. In 2023, gifts of up to $17,000 per person per year may be made with no gift tax ramifications, but even gifts in excess of $17,000 annually simply reduce the federal estate tax exclusion.
Disadvantages of lifetime gifting include:
. Loss of control of assets and personal financial risk -- Some families consider gifting to children, with the informal understanding that the children will, in turn, return income and/or assets to parents if needed. This plan can backfire in many ways. First, if a child has financial issues, goes through a divorce or encounters other financial hardship, assets may be depleted and not be available for anyone. If a child predeceases the parent, unless that child's estate plan protects the parent, assets may be lost. And - if no legal obligation exists, the child may simply have a change of heart, or may interpret any informal agreement differently than the parent anticipated.
• Emotional aspects of losing control of assets should not be underestimated. It's difficult to project life expectancy or what capital may be needed throughout lifetime. Relinquishing control of assets may create stress and loss of financial independence and can change family dynamics. Prior to gifting, be certain that without those assets, long term financial security is still intact. Not only will assets be gone, but income generated by those assets will also be gone.
• Capital Gains Tax Disadvantage -- If appreciated assets are gifted, your original tax basis is retained by the donee, and if that asset is sold, capital gains tax will be due. If the asset is inherited, the beneficiary inherits the asset with a tax basis equal to the value on the date of death, so capital gains tax is ONLY due on appreciation after the date of death. This can be a HUGE disadvantage when highly appreciated assets are being transferred.
• Medicaid risk -- Eligibility rules for government benefits are becoming more and more stringent. Gifting may have grave ramifications, including ineligibility for Medicaid, even if assets are no longer accessible because a donee no longer has them or is unwilling to return them. Additionally, even if eligibility is achieved, locating providers who will accept Medicaid patients is becoming more and more difficult. There may be individuals who qualify for Medicaid, but simply cannot find physicians or nursing homes who are willing to provide service.
• Loss of homestead credit, exclusion from tax on sale of personal residence and other income tax issues -- If you no longer own your home due to lifetime gifting, various income tax advantages may be compromised.
Gifting may be beneficial provided all negatives are acknowledged and understood, and your situation allows you to comfortably and safely make gifts. If this is the case, before finalizing gifts, a close analysis of tax benefits and detriments should be completed before deciding when, how and which assets to gift.