None of us likes to think about our own death or enjoys planning for that occasion. However, if you do not create an estate plan or fail to update it regularly, you are likely setting your loved ones up for even more stress and grief after you pass away. This blog addresses the tendency to give deathbed gifts in lieu of a proper will or trust.
Deathbed Gifts
Update your estate plan to include loved ones who are not provided for in your existing plan. Otherwise, you may make deathbed gifts. It may bring you pleasure to make significant gifts to loved ones because of the joy it may bring to them. However, in addition to the obvious problem that none of us knows the exact time we will die and may not be able to make the deathbed gifts we intend, there are some other drawbacks to deathbed planning that you may not have thought about.
Lack of Basis Adjustment
Although it may seem special and meaningful to provide a gift to a loved one as your last act, it may come with significant costs to them. Under federal tax law, selling or exchanging for more than the original price constitutes capital gains. The original price is its basis. If you make a gift during your lifetime, the recipient of your gift experiences a carryover basis. However, if the same person inherits the property after you die, the basis of the property fits fair market value at the time of your death, aka a basis adjustment. This is important because if the value of the property increased over time, it will likely be worth more at your death than it was when you bought it, perhaps many years ago.
Possible Inclusion of Deathbed Gifts in Your Gross Estate
With a very large estate, you may want to make lifetime gifts. Some do so as a way of decreasing the size of the estate and minimizing the liability for estate taxes. However, avoid the temptation to wait until you are on your deathbed to make those gift. The court may not include these in your estate under some circumstances. The reason? The court does not rule these as “completed” gifts under federal tax law.
Although gifts made within three years of your death are generally includible in your estate, an exception exists if a gift tax return was not required to be filed because the value of the gift was less than the annual exclusion amount. Transfers relating to life insurance policies, however, are an exception to this exception.
Capacity Doubts
To make a valid gift, you must have the mental capacity required by state law, but those standards vary by state. In some states, it is the same standard that must be met to make a valid will. You must:
- Maintain a general understanding of what type and how much property you own.
- Understand to whom you plan to give the property.
- Know that the gift transfers the property. In some states, it may also be necessary for you to understand the effect of the gift on your future financial security.
About Skvarna Law Firm in Glendora and Upland, California
Let a skilled attorney assist with your estate plan. So, contact us today to learn about your options (909) 608-7671. We operate offices in Glendora and Upland, California. Therefore, we provide legal services for individuals living in San Bernardino, Los Angeles, Orange, and Riverside Counties. This includes the cities of Upland, Ontario, Rancho Cucamonga, Fontana, Colton, Rialto, Chino, Chino Hills, Glendora, Claremont, Montclair, Pomona, La Verne, San Dimas, Azusa, Covina, West Covina, Diamond Bar, Walnut, La Puente, Corona, Norco & Mira Loma. Visit SkvarnaLaw.com to learn more.
