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Gifting from a Legal Perspective

While gifting is admirable, it is important that you understand the legal consequences of gifting to prevent unintended consequences. In addition to legal consequences, there are potential tax consequences. It is important that you consult with your accountant prior to making any gifts. This article, while it discusses tax consequences, is not tax advice.

Hypothetical 1: Jack and Jill are excited that their son, Robert, is marrying Amy because she is wonderful. As a result, they decide to gift to Robert and Amy, as their wedding gift, $50,000 for the downpayment of Robert and Amy’s new house.

Currently, the annual federal gift tax exclusion limit is $15,000. Therefore, for each calendar year, Jack and Jill can each gift $15,000 to the same person without exceeding the annual exclusion limit. Under this hypothetical, $60,000 is the exclusion limit. If Jack and Jill only gift to Robert and Amy $50,000 during one calendar year they are within their exclusion limit. However, if Jack and Jill gift more than $60,000 combined to Robert and Amy during the calendar year, then they need to file a gift tax return in order to avoid being taxed on the gift above the exclusion limit.

Because Jack and Jill are providing the $50,000 as a joint gift to Robert and Amy, if Robert and Amy legally separate or divorce – regardless of the reasons – the $50,000 will be treated in the legal separation or divorce as a marital asset. In other words, if the marriage ends because, for example, Amy cheats on Robert, the $50,000 will be considered a marital asset that generally will be divided equally. On the flip side, if Jack and Jill had provided the $50,000 downpayment only to Robert as a wedding gift, and the marriage ends because, for example, Amy cheated on Robert, the $50,000 downpayment plus equity would be Robert’s non-marital asset in a divorce or legal separation.

As a general rule, it is advisable to provide significant gifts only to your child rather than a child and child’s spouse/partner.

Hypothetical 2: Jack is single. He has three children from a previous marriage. He heard that he should quitclaim his homestead, which had no mortgage, to his children in the event that something happens to him and he ends up in a nursing home. So, Jack quitclaims the homestead to his children.

When Jack quitclaimed the homestead to his children, he needed to file a gift tax return because quitclaiming the homestead was a gift to his children above the annual federal gift tax exclusion limit. His failure to do so will result in Jack having to pay taxes on that gift. In addition, Jack’s action also resulted in him losing ownership of his homestead. His children now have the right to either sell the homestead or evict Jack from the homestead. In addition, now his children’s creditors have the right to seize the home for any judgments the creditors have against any of Jack’s children. Furthermore, gifting the home also meant that the homeowner’s insurance is no longer valid. The policy had to be updated to reflect the three children as the owners. Finally, the gift also means that the homestead exemption is automatically lost. The children had to file a new homestead exemption application in order to receive the exemption as the owners.

Spangler and de Stefano, PLLP assists individuals, business owners and their families with estate planning, business succession planning and elder law.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.