Does It Make Sense to Gift an Estate Before Death?

By: Randall A. Denha, J.D., LL.M.

Estate planning is a vital process that involves making decisions about how an individual’s assets will be managed and distributed both during their lifetime and after their death. One popular strategy in estate planning is gifting assets before death. This approach offers a range of advantages and disadvantages that must be carefully considered to ensure that the estate plan aligns with the individual’s long-term goals and circumstances.

The Importance of Estate Planning

Before diving into the specifics of gifting, it’s crucial to understand why estate planning is so important. Estate planning ensures that your wishes are respected after your death, minimizes potential conflicts among heirs, and can help reduce the financial burden on your loved ones. It also provides a framework for managing your affairs if you become incapacitated. Gifting assets before death is one of the many tools available in estate planning to achieve these goals.

Pros of Gifting an Estate Before Death

1. Reduction in Estate Taxes
   One of the primary reasons individuals choose to gift assets during their lifetime is to reduce the size of their taxable estate, thereby lowering potential estate taxes. In 2024, estate taxes remain a concern for many, especially those with significant assets. By gifting property, cash, or other valuables before death, individuals can decrease the value of their estate, which could result in substantial tax savings.

Example:
Consider an individual who owns a vacation home that has appreciated significantly in value. By gifting the property to their child, the future appreciation of that property is excluded from the estate. If the home’s value increases by $200,000 over the next ten years, that appreciation won’t be included in the estate’s taxable value, potentially saving tens of thousands of dollars in estate taxes.

2. Immediate Benefit to Heirs
   Gifting assets before death allows heirs to benefit from them immediately, rather than waiting until the benefactor passes away. This can be particularly advantageous for heirs who need financial assistance for education, purchasing a home, or starting a business. It also allows the giver to witness the positive impact of their gift.

Example:
Parents might choose to gift a portion of their investment portfolio to their children while they are still alive. If a child is starting a new business, this financial support can be instrumental in getting the business off the ground. Alternatively, gifting funds for a grandchild’s college tuition can alleviate the burden of student loans, allowing the grandchild to graduate debt-free.

3. Avoiding Probate
   The probate process can be time-consuming, expensive, and public. Assets that pass through probate are subject to court fees, and the process can take months or even years to complete. By gifting assets before death, individuals can bypass the probate process, ensuring a quicker and more private transfer of wealth to their heirs.

Example:
A family business owner may decide to gift shares of the business to their heirs while they are still alive. This avoids the potential disruption and legal complications that could arise if the business had to go through probate. The heirs can take control of the business immediately, ensuring continuity and stability.

Cons of Gifting an Estate Before Death

1. Loss of Control Over Assets
   When an asset is gifted, the original owner relinquishes control over it, which can be a significant drawback. Once the gift is made, the new owner has full authority to manage, sell, or otherwise dispose of the asset, regardless of the original owner’s wishes.

Example:
Suppose an individual gifts a piece of valuable real estate to their sibling with the intention that it remains in the family. However, once the sibling has ownership, they decide to sell the property to fund their retirement. The original owner has no legal right to prevent this sale, even if it goes against their wishes.

2. Potential for Gift Taxes
   While gifting can reduce estate taxes, it may trigger gift taxes if the value of the gift exceeds the IRS’s annual exclusion limit. In 2024, the annual gift tax exclusion is $18,000 per recipient. Gifts above this threshold may be subject to gift taxes, which could offset some of the tax benefits of reducing the estate’s value.

Example:
If a parent gifts their child a luxury car valued at $50,000, the amount over the $18,000 exclusion ($32,000) could be subject to gift tax. Depending on the overall size of the estate and other factors, this could result in a significant tax liability. Careful planning and consultation with a tax professional can help minimize these risks.

3. Impact on Eligibility for Government Benefits
   Gifting assets can affect an individual’s eligibility for government assistance programs such as Medicaid, which is often needed to cover long-term care costs. Medicaid has a five-year look-back period, meaning any gifts made within five years of applying for benefits could result in penalties or delays in eligibility.

Example:
An elderly individual gifts their home to a relative to reduce their estate size, but within three years, they need to apply for Medicaid to cover nursing home expenses. Because the gift was made within the five-year look-back period, Medicaid may impose a penalty period during which the individual is ineligible for benefits, potentially leading to a significant financial burden.

Considerations and Alternatives

Gifting assets before death is not the only strategy available in estate planning. Alternatives such as setting up trusts, charitable donations, or simply holding onto assets until death may be more appropriate depending on the individual’s circumstances. Trusts, for example, allow for greater control over how and when assets are distributed to beneficiaries, and can also help reduce estate taxes and avoid probate.

Example:
A revocable living trust allows the grantor to maintain control over their assets during their lifetime and specify how they should be distributed after death. Unlike direct gifts, assets in a trust can be managed by a trustee according to the grantor’s wishes, ensuring that they are used appropriately and are protected from creditors or other risks.

Conclusion

Gifting an estate before death is a powerful tool in estate planning, offering significant benefits such as reducing estate taxes, providing immediate financial support to heirs, and avoiding the complexities of probate. However, it also presents challenges, including the loss of control over assets, potential gift tax liabilities, and impacts on eligibility for government benefits. Each individual’s situation is unique, and what works for one person may not be suitable for another.

For those considering gifting as part of their estate plan in 2024, it is essential to engage with a qualified estate planning attorney and tax advisor. These professionals can help navigate the legal and financial complexities, ensuring that the gifting strategy aligns with the individual’s overall goals and provides the desired outcomes for both the giver and their heirs.

Estate planning is a critical process that involves making decisions on how an individual’s assets will be managed and distributed during their lifetime and after their death. One of the strategies used in estate planning is gifting an estate before death. This approach has its advantages and disadvantages, which are important to consider when crafting an estate plan.

Pros of Gifting an Estate Before Death

1. Reduction in Estate Taxes: One of the primary benefits of gifting assets before death is the potential to significantly reduce estate taxes. By transferring ownership of assets during one’s lifetime, the value of the estate at death is decreased, potentially lowering the estate tax liability. For example, if an individual gifts a property to their child that has significantly appreciated in value, the property’s future appreciation is removed from the estate, potentially saving a substantial amount in estate taxes.
2. Immediate Benefit to Heirs: Gifting allows heirs to benefit from assets immediately. This can be particularly advantageous if the heirs need financial support for education, purchasing a home, or other significant expenses. For instance, parents might gift a portion of their estate to their children to help them purchase their first home, providing immediate financial assistance that would otherwise not be possible until after the parents’ death.
3. Avoiding Probate: Assets gifted before death are not subject to probate, the legal process through which a deceased person’s will is validated and their estate is distributed. Probate can be time-consuming and expensive, diminishing the value of the estate passed to the heirs. By gifting assets beforehand, individuals can ensure a smoother and more direct transfer of wealth to their beneficiaries.

Cons of Gifting an Estate Before Death

1. Loss of Control Over Assets: Once an asset is gifted, the original owner relinquishes control over that asset. This could lead to situations where the asset is not managed as the original owner would have preferred. For example, if real estate is gifted to a family member who then decides to sell it, the original owner cannot intervene.
2. Potential for Gift Taxes: While gifting can reduce estate taxes, it may trigger gift taxes if the value of the gift exceeds the annual exclusion limit set by the IRS. For 2023, the annual gift tax exclusion is $16,000 per recipient. This means that any gift above this amount could be taxable, which requires careful planning to avoid unintended tax consequences.
3. Impact on Eligibility for Government Benefits: For individuals who may require government assistance, such as Medicaid, gifting assets can affect eligibility. Assets transferred within a certain look-back period before applying for Medicaid can result in penalties or a delay in eligibility, which could complicate long-term care planning.

In conclusion, gifting an estate before death presents both opportunities and challenges. It offers a strategic way to reduce estate taxes, provide immediate support to heirs, and avoid the probate process. However, it also carries risks, such as loss of control over assets, potential gift taxes, and impacts on eligibility for government benefits. Careful planning with the help of a qualified estate planning attorney can help navigate these complexities, ensuring that the approach to gifting aligns with the individual’s overall estate planning goals.