Gifting, while appreciated and enjoyed by the recipient, can create unexpected problems. Most people know that they can make gifts of $14,000 per person per year without filing a gift tax return. But, most donors do not know that every person can gift $5.25 million over their lifetime without paying any gift tax; however, large gifts require filing a gift tax return (no tax due) along with the donor’s income tax return. It is the donor who files the gift tax return and not the recipient of the gift. Even though there are no gift taxes due, it is important to know that a gift of highly appreciated property creates “back door taxes” for the recipient, which are often not contemplated by the donor when gifted. This usually occurs when seniors gift away assets such as their home, farm, or securities in order to qualify for public assistance, often without considering the tax consequences at stake.
The problem with these gifts to loved ones is that they usually consist of highly appreciated property, where the donor originally purchased the asset that they are gifting away at a fraction of the cost of its current fair market value. As a result, the donor gives his or her children federal capital gains taxes and state income tax. The children would not otherwise have to pay these taxes if they instead simply inherited the property after the donor passes away. These “back door taxes” can be avoided by using certain types of trusts and other long term care planning.
Seniors should also be careful with giving anything other than historical Christmas, birthday, or graduation gifts to children or grandchildren, as even these will create penalties and sanctions if one applies for public assistance to help pay for long term care. For these reasons, seniors should be sure to see an elder law professional today before gifting away assets.