By Attorney Truman Scarborough

A comprehensive description of estate planning would include the accumulation, preservation, and gifting of property.  While most of our lives are devoted to the acquisition and preservation of assets, in time the focus shifts more to gifting. Gifting is not limited to the transfer of assets at our demise. It occurs throughout our lives with gifts to family, church, and charitable organizations. Major lifetime gifts to adult children can include helping them with educational expenses or the purchase of a home. There are benefits to life time gifts, including observing how children are able to handle money; working with them to see that funds are used wisely; and witnessing the happiness our gifts bring. In gifting we can find satisfaction and meaning for our lives.

While a recipient does not have to pay income taxes on these gifts, there are other issues that should be considered when making a lifetime gift. In this article we will be looking at three of these:

STEPPED-UP BASIS FOR CAPITAL GAINS TAX: Gifting of appreciated real estate or securities can result in the person who receives the property paying higher capital gains taxes. When the property is sold, the appreciation in value is reported as capital gain. The gain is calculated by subtracting the “basis” from the sales price. The purchase price plus closing costs and costs of improvements is your basis in the property. With a gift, the child takes your basis in the property. If the child receives property at your demise, he/she obtains a “stepped-up basis”, which is the value of the property at time of death.

For example, if you purchased property for $100,000, that is now worth $200,000 and gave it to a child during your life, he/she would take your basis of $100,000. If he/she then sold the property for $200,000 there would be a $100,000 in taxable capital gains. But if it went to the child at your death, he/she would receive the date of death value as the basis. If your child then sold it for $200,000 there would be no capital gains and no tax.

LOOK-BACK PERIOD FOR MEDICAID: Long term nursing home expenses are covered by Medicaid. Unlike Medicare, Medicaid is only available to those persons who meet an income and asset test. Gifts within a five year “look-back period” can disqualify a person for Medicaid benefits. 

GIFT TAX RETURN: Currently each individual can pass $12,060,000 free of both gift and estate taxes. For a couple that is $24,120,000. To the extent a portion of this exemption is used with gifts during your life, it is not available at your demise. In addition to the $12,060,000 there is a $16,000 (as of 2022) per individual “annual gift tax exclusion” that does not count against the $12,060,000.

Although no taxes are due until total gifts exceed $12,060,000, a 709 gift tax return is required any year you give more than $16,000 to a single individual. Nevertheless, it has been reported that IRS believes that many taxpayers who should fail to file the required 709 gift tax return.

In this article we have discussed outright gifts; there are additional issues to be considered when adding children’s names to property. This will be the subject of the next Senior Scene article.

For further information on estate planning you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.