Pitfalls of gifting and joint ownership of assets

There is a popular misperception among many seniors that in order to protect their assets from creditors, including the cost of nursing home care, they should consider gifting their assets to their children. There are three significant problems inherent with such an asset transfer strategy.

First, the laws that govern eligibility for government-funded nursing home benefits (Medicaid), provide for a 60-month “look-back” period designed to capture gifting of assets. This results in the person making the gift being ineligible for any Medicaid benefits for a period of time of up to 60 months (and potentially longer) from the date the gift was made.

Secondly, creditors of the person making the gift could claim that the transfer was a fraudulent transfer made in an attempt to defeat the rights of creditors. This could result in both the parent and child being tied up in court over a creditor claim.

Lastly, and possibly most problematic, is the possibility that the creditors of the child will attach the assets in order to satisfy their claims against the child. The child’s creditors could also include the child’s spouse in a divorce proceeding. As a result of these inherent risks, seniors who seek to protect assets by making gifts to their children are often creating more problems than they are solving.

Gifting of assets was a popular estate planning strategy to reduce or eliminate estate taxes. In past years, there were significant gift/estate tax advantages to a person making annual or periodic gifts to their children. However, in light of the increased federal gift and estate tax exemptions, (the current exemptions are $12.92 million per person), gifting as an estate planning technique is no longer needed for the majority of families.

Another disadvantage to gifting is that a gift is a transfer of tax cost basis from the parent to the child for capital gains tax purposes. The child would be forced to pay capital gains taxes on the increase in value from the parent’s tax cost (usually the 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 is used. For these reasons, many seniors should seriously evaluate whether gifting is an appropriate method for transferring assets. In most cases, the senior will discover that gifting is not the best strategy for achieving their goals. If asset protection from a nursing home is the goal, an irrevocable trust is a much better alternative to gifting.

An additional problem that seniors encounter in managing their assets are jointly owned assets, especially bank accounts. I see many clients who have been instructed (often by the bank) to title their bank account in the joint name(s) of their children. The bankers are trying to be helpful to their clients since a joint account is easily accessible by the child to help pay their parents’ bills, etc. However, the problem with a jointly owned bank account is that by placing the child’s name on the account, the parent may be unwittingly subjecting their account to the potential claims of the creditors or spouses of their children.

Further, since a jointly owned bank account normally passes only to the surviving joint owner (in this case the child who was put on the account), the parent may be circumventing their estate planning goals by having that account pass directly to one child rather than passing equally to all the remaining children under their Will or Trust. A better planning method is to have your bank accounts (as well as certain assets) either titled in your individual name (or joint with your spouse) or in the name of your trust. Of course, if you are going to have assets in your individual name you will need a Durable Power of Attorney authorizing your child or other trusted person to manage your affairs in the event you become incapacitated.

A properly set up estate plan can avoid many of the pitfalls associated with gifting and joint ownership. Prior to making gifts or establishing joint accounts with your children, I strongly recommend you consult with an elder care attorney to make sure you are achieving your goals without subjecting your assets to unnecessary risks.