By Attorney Ted Brown
In previous blogs, I have discussed ways to use an irrevocable trust to reduce estate tax liability. I have discussed a technique known as controlled gifting. One issue that arises in many of these situation is that of capital gains tax.
Capital gains tax applies to the sale of appreciated assets such as land or stocks. The tax is based on the profit that one earns on the sale. For example, if you buy a piece of land for $100,000 and you sell it for $225,000, you have a capital gain of $125,000. This is subject to a tax rate of 15-25% plus an additional 5% of state income tax on the gain.
In an effort to get assets “out of their estate” so as to be protected from estate tax as well as a nursing home , many people consider deeding their real estate to their children. This is a very risky strategy for a variety of reasons.
A gift of property during the owner's lifetime results in a carry-over of the original sales price to the recipient. When the recipient eventually sells, they will owe capital gains tax on the difference between the sale price and the price that the original owner paid. Depending on how much the property has appreciated over time, this could result in a stifling capital gains tax problem for the recipient.
Moreover, if the property is in the hands of someone else, it is subject to the liabilities of that person. Suppose the recipient gets sued or divorced. The entire property could be lost to pay their debts leaving you without a place to live.
Finally, the Medicaid rules count a gift of any kind made within 5 years as if it is still yours. Even though you no longer own the property, you will not qualify for Medicaid until its value is “spent down.”
It is very important to understand the many potential consequences of gifting any assets, particularly real estate, before embarking on such a plan. An Elder Law Attorney can explain the many complexities of gifting and asset protection.