Here’s a very common question I am asked:
“How much can I give my kids while I’m alive?”
The correct answer is “How much ya got? You can give it all away to them”.
It's true. This is still a more-or-less free country, and if you own it, you have the right to give it away. But that doesn't mean there aren't consequences if you do.
Every action has consequences, even if you have the right to take that action. You have a right to wear satanic symbols on your T-shirt, but that doesn't mean they can't kick you out of the church choir. You have the right to put a MAGA sign on your lawn, but that doesn't mean the neighbors can't disinvite you from their next cocktail party. You have the right to dress like a goth, but it may cost you some dating opportunities.
Giving away your assets may have consequences too.
The one most people worry about is the gift tax. But that's not actually a big issue. Gift taxes only apply if you give away, during your lifetime, more than $12 million. That may be a problem for Bill Gates or Elon Musk, but not for most of us, especially since you can easily double that up for a married couple. You might want to be aware that in a few years, if Congress does not agree to an extension, that exclusion amount automatically drops to $6 million each, but again, that isn’t a problem for too many people. If you are concerned about that, you should probably call your accountant. Or maybe have your butler call your accountant for you.
Capital gains taxes are an issue for a lot more people. If you have an asset that has gone up in value (for instance, a rental property) and you hold it until you die, your heirs don't ever have to pay the capital gains tax on that property. But if you give that asset away to your kids, then when they eventually sell it, they will have to pay that capital gains tax. So giving away an “appreciated asset” can sometimes cost you a huge tax break.
Then there is Medicaid. If you give away an asset and then, within five years after that, you apply for Medicaid, you are disqualified for a certain amount of time. The “penalty period” depends on how much you gave away, and sometimes this can actually be a useful strategy. But it is a risky strategy and has to be done very carefully. If you give away a large part of your assets, and then something happens to you within that five years (for instance, a stroke, brain injury or dementia) you may not have enough left to pay for the cost of assisted living while you are sitting in the Medicaid penalty box.
Sometimes people try to give away assets in order to avoid a potential liability. So for example, if you have been in an accident that was your fault, you might give away your assets to your kids so that the other party can't take those assets in a lawsuit. This is highly problematical. There is something called the Fraudulent Conveyance Act, which allows creditors to claw back assets if they were given away when you already had a liability. Incidentally, they don't have to actually have a judgment against you, or have even filed a lawsuit. If you cause an accident, and then you immediately run over to the bank, withdraw all your savings, and hand it over to your daughter, they can still claw that money back from her, because you already caused the accident. You had the liability, even if you didn’t yet have a judgment against you.
Of course, the biggest consequence to giving away assets is that you don't have those assets any more. If it is truly a gift, at least legally speaking, the recipient of that gift does not have to give it back to you if you have an unexpected financial reverse. And if the recipient also suffers financial reverses (or has an unexpected medical crisis, or goes through a divorce, or gets sued, or any number of other possible misfortunes) he or she may not be in a position to give you the money back.
All of this brings me to one final point. There is a statute which limits how much you can give away without filing a gift tax return. The amount has varied over the years, but right now it is $16,000. You can give away that much money each year, to as many people as you like, and you don't have to file a gift tax return or have it count against your $12 million lifetime total for gift tax.
And I see people, all the time, giving away $16,000 every year to each of their heirs, because they think that will save them on taxes.
But if I am never going to be subject to the gift tax (because I have less than $12 million) that doesn't do me any good for tax purposes. In fact it may cost me on capital gains taxes if the asset has gone up in value. And Medicaid will still put me in the penalty box if I apply within five years, because the $16,000 is a tax law, and has nothing to do with Medicaid. And if I have a liability, my creditors can still get that money back through the Fraudulent Conveyance Act.
I’m not saying you shouldn’t be generous with your money. Just do it with your eyes open. There are consequences.
Kenneth Kirk is an Anchorage estate planning lawyer. Nothing in this article should be taken as legal advice for a specific situation; for specific advice you should consult a professional who can take all the facts into account. The reference above to your having the right to put a MAGA sign on your lawn should not be taken as suggesting you don’t have to follow zoning and signage laws.
