The Federal Government assesses a tax on assets that are gratuitously transferred to another person. Assets transferred during the donor’s lifetime are subject to gift tax. Assets transferred after death are subject to estate tax. The gift tax rate and the estate tax rate are both 40%. The Federal Government provides U.S. citizens and residents a credit to apply towards the payment of estate and gift taxes. This credit, often referred to as the Unified Credit, allows individuals to transfer $1l-,400,000 (2019 value) in assets during lifetime (gift) or at death (estate) with no tax liability. This consistency between the estate and gift tax regimes often leads clients to ask, “does it matter when I transfer my assets to my children?” The answer is “Yes.” The timing of a gratuitous transfer has significant income tax consequences.
In general, assets acquired by gift have a “carryover” income tax basis for the person that receives the property. For example, Dad gifts Son 100 shares of Company stock. Dad purchased the stock for $5,000 in 1990. The fair market value of the stock on the day of the gift is $700,000. Son will receive the stock with an income tax basis of $5,000. The income tax basis is “carried over” from Dad. If Son sells the stock immediately after receiving the gift, Son will recognize a $695,000 gain, subject to capital gains tax.
In the alternative, a beneficiary acquiring assets from a decedent will receive the property with an income tax basis equal to the fair market value of the asset on the date of the decedent’s death. For example, Son receives 100 shares of Company stock as a beneficiary of Dad’s trust. Dad purchased the stock in 1990 for $5,000. On Dad’s date of death, the fair market value of the stock was $800,000. Son will receive the stock with the income tax basis of $800,000. If Son sells the stock for $800,000 immediately after receiving the stock, Son will not recognize any gain.
Most clients and their children will receive the greatest tax benefit by transferring assets at death. There are exceptions to this rule. For example, clients with assets greater than the Unified Credit amount should consider lifetime gifting to take advantage of the annual gift exclusion. Clients should also consider lifetime gifting if they own highly appreciable assets. These exceptions, as well as other concerns (tax and not tax related) should be discussed with your estate planning attorney before making decisions about the transfer of your assets.
When most people hear about elder abuse, they think of cruel or apathetic caregivers leaving elderly family and friends unattended or physically abusing them. But elder abuse is more than physical abuse: when someone takes any property - including real estate, cash, or any other asset or interest - from a person over the age of 65 by fraud or undue influence, it constitutes financial elder abuse.
Spendthrift Trusts, Limited Protection for Deadbeat Beneficiaries. - California law has long recognized a settlor’s right to restrict a beneficiary’s use of trust assets. Restraints on alienation, spendthrift clauses, shutdown clauses and wholly discretionary trusts are a few of the tools settlors may use when creating a trust for the benefit of someone likely to have creditor problems.
Tax Strategies and Implications When Settling a Trust or Estate Dispute.