Why Probate May be Preferred to Receiving a Gift During Life
In our age of immediate online information, people sometimes bypass professional help, which can cause irreparable harm later.
The “internet self-help” phenomenon happens in almost every discipline, including the automotive, medical, financial, tax and legal professions, often to the detriment of the consumer.
The internet should not replace a qualified professional with years of experience in their field of expertise. Typically a consumer does not pay for solution to their problem that took only a few minutes to discuss or implement, rather they pay for the years of experience and education that allowed the professional to be able to provide the solution to the problem.
In my almost 20 years of practice, I have seen many “self-help” estate plans, whether in the form of self-help forms, internet solutions or an idea from a radio program or friend. On many occasions, these turn out to be laden with problems, inconsistencies, and issues that are detrimental to a family.
One self-help solution that I have seen is when a parent makes a gift of personal or real property to a child just prior to death to avoid probate. Although a parent has the right to make a “death-bed” gift to their children or any other person, there may adverse consequences for doing so.
Assuming the capacity of the parent making the gift is not questioned, the parent and the child should still consider the possible gift tax and income tax implications of the gift being made prior to death.
Under current gift tax laws, a parent may gift to a beneficiary (whether a child or not) assets valued up to $15,000 per calendar year without any gift tax consequences. Gifts over this amount, trigger the requirement of the grantor to file a gift tax return (IRS Form 709) and the utilization of his or her lifetime gift tax exclusion. In most cases, between the annual gift tax exclusion and the lifetime gift tax exemption, there will not be any actual gift taxes owed to the IRS.
A bigger concern that should be discussed is the possible income tax consequences of the “death-bed” gift. When a gift is made, whether it be real property or personal property, the recipient takes on the adjusted cost basis of the grantor. Your tax basis is important because when you sell the gifted property, you will have to report the difference between your tax basis and the sale price as gain, which is taxable.
For example purposes only, if a parent purchased a home 25 years ago for $100,000 and it is worth $300,000 on the date of the gift, the child would receive the property with a tax basis of $100,000.
However, if the parent would have hired a qualified estate planning attorney and utilized a beneficiary deed, revocable trust or even a simple last will and testament that distributed the property to the child at the parent’s death, the tax basis would have been a full $300,000 at the parent’s death, which lessens your tax liability if you decided to sell the home.
Therefore, the parent’s attempt in this example to avoid probate and gift the home to the child before death is actually detrimental to the child from an income tax perspective, since the child’s tax basis in the home would be $100,000 rather than $300,000.
It would have better for the parent to prepare a simple will and have the property distributed to the child through the probate process after death.
Even better, the parent could have done some additional estate planning, avoided probate altogether and allowed the property to be distributed to the child with a full $300,000 tax basis.
If you have any questions regarding family based estate planning, Arizona probate administration, Arizona trust administration or any other legal issues, please call the probate attorneys at (480) 833-1113.
Attorney Profile: Kenneth C. Barney
Main Areas of Law:
Probate in Arizona
Estate Planning – Wills, Trusts & More
Blog: Ken Barney’s articles
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