One of the most frequent questions I am asked by clients is whether they should start giving away property prior to their death. The most common rationale is the belief that these “deathbed gifts” may simplify matters after their death. Unfortunately, making such gifts can have the opposite effect and prove very costly to your family.
Since taxes is one of my favorite subjects, let’s discuss that issue first. When you gift property, your cost basis carries over to the recipient. Conversely, inherited property receives a stepped-up cost basis equal to the fair market value on the date of death. As a result, gifting property that has increased in value can cost your family significant tax dollars.
To illustrate, consider the tax impact of the following real estate:
Current Value: $200,000
Original Cost: 40,000
Appreciation $160,000
Tax Rate: 25%
If you were to make a lifetime gift of the property and the recipient subsequently sells it, the taxable gain would be $160,000, yielding a tax bill of $40,000. In contrast, if you retain ownership of the property until death, your family can sell the property and pay ZERO tax! This result stems from your family obtaining the stepped-up basis equal to the property’s value at your death. In this example, your family gets an extra $40,000 benefit simply by foregoing any lifetime gifts.
Lifetime gifts can be even more costly. If the recipient of the gift experiences a divorce, bankruptcy or disability, their creditors may end up with the entire property. Likewise, if circumstances change in your family, you would have lost the ability to control the terms surrounding the distribution of your property.
While there are situations where lifetime gifts make sense, we strongly encourage you to consult with us if you contemplate making such gifts to ensure it is in the best interests of your family.
Blaine Peterson
Attorney
Parman & Easterday
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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