Is it Better to Simply Make Gifts to My Children rather than Setting Up an Irrevocable Trust?

This edition of the Koldin Report E-Newsletter continues a series on common misconceptions about Elder Law, Estate Planning and Medicaid.

In this newsletter we discuss misconceptions about gifting assets to children or other family members.

All prior newsletters are saved on our website. You can read them by clicking here.

Incorrect: It is better to simply transfer my family home and life savings to my children.

Correct: Many attorneys are not familiar with the specially designed family trust and encourage their clients to transfer the family home and other assets directly to the children. There are many pitfalls to transferring the home or other assets to the children such as:

  • Gifting real estate or highly appreciated investments could result in a large capital gain upon the subsequent sale
  • Child could become ill and need long-term care and your life savings might have to be spent on your child’s nursing home bills.
  • Child dies before you and your savings could pass to someone else in your child’s will
  • Child could be sued and your assets could be lost to the person suing your child
  • Child could file for bankruptcy and your savings could be subject to child’s creditors
  • Child could get divorced and your savings could be subject to claims by the child’s spouse
  • Transferring assets could affect your grandchildren's financial aid for college
  • Transfers can increase your child’s income tax liability
  • Gift tax consequences
  • Transferring to your child could make you uncomfortable and feel like you have lost control

Many of the disadvantages outlined above can be avoided if you transfer your home and some of your life savings to a specially designed Irrevocable Trust.

Also, many people have the misconception that gifting to a child keeps you in control, but setting up an Irrevocable Trust causes you to lose control. In fact, the opposite is true.

Once you make a gift to your child, he/she now owns that asset and has full control over it.

Yet, as discussed in the previous newsletter, with an Irrevocable Trust, you can name your child or children as Trustees and beneficiaries. You retain control to change the beneficiaries and thus indirectly maintain very important control over the Trust.

There are many ways to prepare an Irrevocable Trust and the terms of the Trust can be different depending on your circumstances and how your attorney writes his/her Trusts.

Therefore, the information provided below is based on a typical Irrevocable Trust prepared by the Koldin Law Center, P.C. which:

  • Will not result in income tax consequences for children
  • Will not cause financial aid problems for grandchildren
  • Will not cause you to lose your life savings if your child becomes bankrupt, is sued, involved in a divorce, dies before you, or becomes ill and needs nursing home care
  • Will not result in gift tax liability
  • Will avoid probate for all assets you transfer to your Trust
  • Will receive a stepped-up basis to the date of death value of your home and investments that are sold after your death for capital gains tax purposes
  • Will give you the right to change the beneficiaries of the Trust. Therefore, if circumstances change in your children’s lives or in your relationship with your children, you retain ultimate control over who inherits your life savings and family home
  • Will allow you to maintain your STAR and Veteran exemption on your home when transferred to your Trust

For more information about Irrevocable Trusts, please see our website by clicking here.

At the Koldin Law Center, P.C., located in East Syracuse, New York, we have over 50 years of experience helping individuals plan for immediate crisis and long term care. Our attorneys are available to discuss your estate planning options, including the advantages and disadvantages of Revocable Trusts and Irrevocable Trusts, along with other estate planning considerations including a Will, Power of Attorney, and Health Care Proxy. We do not charge a fee for the initial consultation. We welcome your children, family attorney, accountant, and/or financial planner to be present at the initial consultation.

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Remember that the Koldin Law Center offers many services for clients of all ages. Our services range from basic estate planning such as a simple will to complex estate planning including asset preservation planning.

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