Thinking About Gifting to Your Children?

You may want to think again!

It’s common for a parent, or parents, to start gifting assets to their children as they get older. The problem is that they don’t seek advice and if they do, it’s typically from the wrong people. Unfortunately, the result can be very costly to the family. It could rock a number of unnecessary boats. Here are just a few:

• Exposure to excess liability risks, including creditors and lawsuits
• Exposure to divorce risk
• Exposure to other business risks the recipient may have
• Negatively affect long-term healthcare funding needs
• Upset family relations
• Unintentionally disinherit your grandchildren
• Unintentional transfer of the asset(s) to a spouse you never knew
• Potentially increase annual income taxes
• An unnecessary increase estate and gift taxes 
• Increased taxes on the asset

Going through each of these in detail would be impossible for one commentary, but I want to give you flavor of what you may not know that you may not know. So, let’s talk increased taxes.

What is “cost basis?” Cost basis is your taxable basis in an asset. Most often it is the amount you paid for the asset minus any taxable depreciation you took over the time you have owned the asset. This becomes important when the asset is sold. The amount that is taxed is the difference between the amount you sold it for and the cost basis. The tax rate could be a combination of capital gains rates and ordinary income rates.

When you gift an asset, the recipient of the gift also receives your cost basis in that asset. If the recipient later sells the asset, they will realize taxes in the same way you would if you sold it, but at his/her income tax rates.

Next, let’s look at what happens if you don’t gift the asset and you own it when you pass away. Current law states that if you still owned this asset when you die, then your heirs will receive the asset with a “step to” in basis. This means the taxable basis would be revised to the fair market value of the asset when you pass away.

You may be thinking…that isn’t a big deal. My family will never sell this…land, business, etc. WRONG! Perhaps the fact that they won’t sell is true, but this thinking fosters the idea that a taxable basis isn’t important for any other reason. It is important.

For example, let’s say that your children inherit rental properties or even equipment that you have fully depreciated. Your basis is $0. Your children will have the opportunity to use their newly inherited basis to depreciate these assets once again. Similarly, did you know that you can even potentially depreciate nutrients in your land if you are farming and ranching? Yes, I said land. Most people don’t even know it is depreciable. This could be worth who knows how much in tax savings!

At the end of the day, it may be the best solution to gift an asset. Even so, however, there is probably a certain way you need to do it to help avoid those nasty pitfalls. The bottom-line is: DON’T BE TRIGGER HAPPY AND MAKE COSTLY MISTAKES! We’re here to help with any planning needs you may have.