To most people, gifting comes naturally and without analysis. However, it is important to make certain that you understand the legal and tax consequences to any gifts that you make prior to making the gifts. This article, while it discusses tax consequences, is not tax advice.
Hypothetical 1: Rosie is not married and has one adult child. She recently had some health issues and decides it is now time to start gifting assets to her daughter. Her estate is worth $3,500,000. She knows that in Minnesota the estate tax exemption is $3,000,000 and there is no gift tax. So, she gifts her $500,000 home to her adult child. Two months later, Rosie passes away with her current estate (not including the gifted home) being valued at $3,000,000.
While Minnesota does not have a gift tax, there is a federal and estate gift tax exemption that allows Rosie, as a general rule, to gift $15,000 each calendar year to her adult child without exceeding the annual federal exclusion limit. As a result, Rosie’s estate will need to file a federal gift tax return by the applicable deadline. In addition, while Minnesota does not have a gift tax, Minnesota requires that any gifts made in the three years prior to a decedent’s death are included for determining Minnesota estate tax. Therefore, Rosie’s estate will be valued at $3,500,000 for purposes of Minnesota’s estate tax. As a result, the estate will need to pay estate tax on $500,000 as that is above the $3,000,000 estate tax exemption in Minnesota (the federal gift and estate tax is more than eleven million so there is no federal gift or estate tax).
Hypothetical 2: Samantha transfers her house to her granddaughter, but Samantha retained a life estate, which allows her to live in the house until her death. Samantha passes away.
The value of the house is included in Samantha’s estate because when she died she still held the life estate. So, when Samantha transferred the house to her granddaughter, she needed to report the gift to Samantha as it exceeded the $15,000 exclusion. In addition, at the time of Samantha’s death, additional tax documents need to be filed with the Internal Revenue Service.
As with any gift, it is important to seek the advice of your accountant prior to making such gift so you understand the tax consequences. The taxation of gifts varies depending on several factors. For example, whether you are married, whether you are a nonresident non U.S. citizen, whether your gift was to a spouse who is not a U.S. citizen, the type of gift, etc. In addition to the tax consequences, it is important that you seek the advice of your attorney prior to making such gift so you understand the legal consequences. For example, if you are gifting your home to your children to take advantage of the current five year look back period for Medical Assistance planning purposes, by doing so you are no longer the owner of your home, and your children can evict you, mortgage it, or sell it. In addition, by gifting your home, it could be seized by a child’s creditor to pay for your child’s debts.
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.