The 4 Questions to Answer Before Making Gifts [Part 4 of 4]

December 19, 2013 6:06 pm

In our estate planning and elder law practice, we talk with many clients who are interested in making significant gifts of assets during their lifetimes to their children. Anytime we meet to discuss lifetime gifting, we inevitably discuss 4 topics of consideration:

1. Will the gift create federal gift tax problems? 2. Will the gift create Medicaid eligibility problems? 3. Will the gift create income tax basis problems for the next generation? 4. Will the gift create state property law problems?

The discussions regarding the first three questions can be found here: Part 1 of 4, here: Part 2 of 4, and here: Part 3 of 4. Finally, the fourth installment:

Will the gift create state property law problems?

The point I want to drive home here is perhaps obvious to some, but it is nevertheless worth repeating:  when an outright gift of property is made from one person to another, the receipient of the gift has all rights to that property, even to the exclusion of the person making the gift.

That fairly straightforward concept has a few important implications:

1.  Recepient creditor problems.  Suppose the recipient of the property is sued for some uninsured negligent act and loses the property.  Alternatively, suppose the recipient of the property offers it as collateral to finance a project that ultimately fails and the property is lost.  In any event, the important consideration is that, as soon as the gift is completed, the property is subject to the recipient’s financial problems.

2.  Recipient general decision making.  Absent some kind of restriction, as soon as the gift is made, the recepient can turn around and resell the property or give it to someone else.  In other words, unless careful planning has been done, the recepient of the gift is free to deal with the property as if he or she owned it from the beginning.  If there is a long-term strategy in mind for a particular asset, making an outright gift to someone else can sometimes create problems.

3.  Recipient marital problems.  What happens when the recipient of the gift gets involved in a divorce (without a prenuptial agreement)? In a perfect world, an asset given from a parent to an adult child shouldn’t be considered a marital asset in the hands of the adult child, i.e., the asset really isn’t a product of the marriage – it’s a form of inheritance.  However, in many marriages, assets become comingled and line between marital property and separate property can become blurry.  For that reason, it’s difficult to rest absolutely assured that a gifted property won’t be involved in the recipient’s divorce.  For those reasons, individuals will sometimes run gifts through a trust or some other vehicle to better plan for any marital difficulties that might arise for the recipient.

There are some situations where a gift will only be partially made so that the individual making the gift is holding on to some interest to better protect the asset from the problems mentioned above.  However, retaining that type of control frequently undermines the original purpose behind making the gift.  Even with that limitation, there are frequently ways to plan around the property problems described above if the individual making the gift has concerns.

Mark Coriell 

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