Give From Your Heart But Use Your Head – Part Two

INTRO: In Part One of this series, we spoke about how easy it is to make a mistake about the timing, type and/or amount of a prospective gift. Ultimately, it may or may not be wise to make the gift at all. Here are more examples of common gift-giving mistakes, some of which can be painful.

Mistake #4: Making lifetime versus testamentary gifts of appreciated assets. Elders are often inclined to make lifetime gifts of highly appreciated assets, such as a principal residence, vacation home or investment property, to children or other loved ones. However, if your loved ones instead receive such appreciated asset on your death, they receive a major income tax benefit known as a “step-up” in income tax basis. This allows the inheritor to sell the asset and pay no income tax on the sale. Alternatively, if you gifted the same asset during your life and your loved ones sold the asset, they would step into your shoes and be liable for income tax just as you would have been if you had sold the asset. Accordingly, it behooves you to talk to your tax advisor to determine how compelling the basis “step-up” will be if you keep an appreciated asset and gift it on your death (e.g. through your living trust) rather than during your life.

Mistake # 5: Gifting to minors into a custodial account. Many people make substantial gifts to minors into custodial accounts without realizing that the minor for whom the account is established will irrevocably own and control the funds upon reaching 18 – the age of majority (or as otherwise set up when establishing the account – in California, no older than 25). Instead, by creating an irrevocable trust for the minor, you can meaningfully control the disposition of funds to the child before and after he or she reaches a certain age(s) and/or satisfies certain conditions that you, the donor, deem necessary or appropriate. You can name a trustee and successor trustees in whom you have confidence to manage and distribute the funds prudently to the beneficiary.

This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.

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