At Powers & French, we often have elderly clients who ask whether they should start transferring their assets to their adult children in order to avoid estate taxation or having to use all of their savings to finance long term care. Our answer is usually a resounding “No”. While legal advice differs widely depending on individual circumstances, here are some reasons why elders should think twice before giving away their assets:
- Loss of Value: By gifting property, you divest yourself of an asset that then will not be available to you should you need funds in the future to finance your care or living expenses, or even just want funds to enjoy in other ways. For example, keeping your home allows the future possibility of a sale, a home equity loan, a mortgage or a reverse mortgage to obtain funds.
- Lose of Control: Once you give away property, you no longer have any legal rights to that property. This means that you would not have a legal right to live on gifted property or to make any decisions in regards to the property. The new owner has the rights to sell, mortgage, change or give away the property.
- Property Subject to New Liability: Gifted property becomes subject to claims by the new owner’s creditors, and can be claimed in other legal proceedings, such as a divorce.
- MaineCare Nursing Home Coverage Eligibility: Transferring property jeopardizes MaineCare eligibility for five years after any transfer. MaineCare has a five year look back period, which means that assets transferred within five years of a MaineCare application are considered to be your assets and so can render you ineligible for nursing home care if they exceed MaineCare asset guidelines. The penalty period depends on the value of the property transferred.
- Gift Taxes: Giving property (including real estate) to another person without compensation constitutes a taxable gift under federal tax law. Current law provides that each person can give $5 million in property over their lifetime before incurring any gift taxes. But gift tax returns need to be filed for all gifts of property in excess of $13,000 per person.
- Estate Taxes: The Maine estate tax exemption amount is $1 million; the federal estate tax exemption amount is $5 million. For estates worth less than these amounts, estate taxes are not a reason to transfer assets. For estates worth more than the exemption amounts, transferring assets to another owner can save estate taxes but there are options that can protect the grantor. Gifting to a trust can allow greater control over how the assets are used and protect them from creditors. Life estates allow grantors to remain in their homes for their lifetimes.
- Keep Them Calling and Content: There is a cynical old adage that, if you want your children to keep calling and visiting you, don’t give them everything while you’re still alive. Another cautionary note is that dividing property among relatives can lead to one being dissatisfied with their gift as compared to someone else’s gift. We’ve had clients who have been surprised at how their gifts have created conflict and hard feelings, and that their attempts to simplify their lives backfired and made them more difficult.