Many people try their own estate planning and can have problems with gifting and joint ownership to avoid probate.
Trying to simplify asset protection by gifting is loaded with risks, says a recent article, “SENIOR SCENE | Pitfalls of gifting and joint ownership of assets” from The Sentinel-Record.
Most notably, the laws governing eligibility for Medicaid used for nursing home care require a 60-month “look-back” period, where any transfer of assets for any reason makes the person ineligible for Medicaid benefits up to 60 months or even longer from the date the gift was made.
Secondly, creditors of the person making a gift could claim any transfer was a fraudulent transfer made to defeat the creditors’ rights to make a claim. Both parent and child could end up in costly, time-consuming litigation over creditor claims.
Third, and perhaps most problematic, is the chance for the child’s creditors to attach the assets to satisfy a claim against the child. This could also occur if the child is embroiled in a divorce—the assets could be considered a marital asset by the court.
Gifting assets was a popular estate planning strategy to reduce or eliminate estate taxes in the past. Nevertheless, this is only used for some families in light of the very high current federal estate tax exemptions.
An added problem with gifting and joint ownership is the transfer of tax cost basis from the parent to the child for capital gains tax purposes. As a result, the child would be forced to pay capital gains taxes on the increase in value from the parent’s tax cost—typically the original purchase price—versus the ultimate sales price.
Contrast this with a child who inherits an asset at death from a parent. When the child inherits the asset at death, the asset receives a step-up in tax basis to its date-of-death value. This is one of the most favorable tax rules remaining, which is lost when gifting during life is used.
Another problem with gifting and joint ownership occurs when seniors make assets jointly owned, especially bank accounts. The bank often encourages this, trying to be helpful so the child may pay the parents’ bills. However, by placing the child’s name on the account, the parent may be subjecting their account to potential creditor claims of their children.
In addition, the jointly owned account passes only to the surviving owner, so the estate plan may be circumvented by having the assets in the account pass to the one child rather than passing to all the remaining trust under a will or trust.
An estate plan created by an experienced estate planning attorney can eliminate many problems with gifting and joint ownership. Before making gifts or establishing joint accounts, meet with an estate planning attorney to learn how to achieve your goals, including planning for Medicaid, without putting your assets at risk.
Reference: The Sentinel-Record (May 28, 2023) “SENIOR SCENE | Pitfalls of gifting and joint ownership of assets.”