I’ve invited San Francisco estate planning lawyer, Amir Rang to discuss why it’s a bad idea to leave property to your children by adding your child to the title. Frequently, I will meet with clients who will put their entire life savings at risk by doing their own estate planning. Penny wise, pound foolish. Here’s Amir on why doing your own estate planning is a bad idea. You can also listen to our Podcast on why cutting your own hair is a bad idea as well as Legalzoom.
Lifetime gifting of appreciated property can create unintended and disastrous consequences. In a loving and generous act, parents (or grandparents) often gift appreciated stocks or real estate to adult children (or grandchildren). The older generation usually adds the names of adult children to brokerage accounts as joint account holders in order to plan for incapacity and disability. Or, the older generation adds the names of adult children to title of homes as co-owners in order to avoid a probate court proceeding upon their death. Here’s why the adult children (or grandchildren) should respectfully tell the older generation, “If you love me, then don’t gift it to me.”
Gift and Estate Tax Consequences:
A donor (i.e., the person giving the gift) must file a form 709 (gift tax return) for any gifts over $13,000 per year per recipient. Because the current lifetime gifting exemption amount is high ($5 million), usually, there is no actual gift tax due when parents (or grandparents) gift appreciated stocks or appreciated real estate to adult children (or grandchildren). However, there are two common pitfalls in these situations. First, the older generation simply fails to file the required gift tax return, exposing the estate to non-filing penalties. Two, by haphazardly using up their lifetime gifting exemption amount, the older generation is unknowingly reducing their estate tax exemption amount as well. What does that mean? In effect, the older generation will be able to transfer less ‘estate-tax free’ wealth at their deaths.
Income Tax Consequences:
A gift recipient, who receives appreciated stocks or real estate, inherits the older generation’s original cost or basis in the property. This usually leads to a devastating income tax position for the adult children (or grandchildren). Example: (i) grandma purchased home for $10,000 a long time; (ii)grandma gifts home with a current fair market value of $1,010,000 to granddaughter; (iii) grandma dies; (iv) granddaughter sells home for $1,010,000. Granddaughter has to pay income tax (fed + CA) of about $200,000. If grandma had left the home to granddaughter in her will or in her trust (at her death instead of during life), then the granddaughter’s income tax would have been zero.
Liability Consequences:
Oftentimes, the older generation wants to allow the adult child (or grandchild) to claim the mortgage interest deduction for paying the monthly mortgage. So, they add the adult child to the title of a home without thinking twice. In fact, adding an adult child to the title of a home (or an investment property) can have disastrous liability consequences. If the adult child gets into an accident or if the adult child goes through a divorce or if the adult child goes through a bankruptcy, then the older generation’s home and sole sanctuary can be exposed to unknown creditors and drawn out court proceedings. Parents and grandparents should consult a tax attorney or CPA if they want to allow their child or grandchild to claim the mortgage interest deduction on their home.
Bottom line:
Given the potentially detrimental gift, estate, and income tax consequences and disastrous liability consequences of lifetime gifting of appreciated property, parents and grandparents should consult with their professional advisors before giving away too much!
Amir Atashi Rang is a San Francisco lawyer and he practices estate planning, tax law, and probate. You can reach him at 415-398-7275 or visit his website here.
