Coming to terms with our own mortality often leads us to start thinking about estate planning and ultimately avoiding probate fees on death. However, gifting property before death in order to avoid probate fees can lead to some unintended consequences.
The Gifting Strategy
Probate is a court process that validates a person’s will and confirms the estate administrator has the authority to act.
Probate fees are charged on the fair market value of a deceased person’s property at the time of their death. Probate only covers property that was owned by the deceased when they died. Thus anything that was given away or sold before death is not subject to probate and probate fees.
By giving away property that you no longer need before you die can reduce the probate fees. However, the gift can lead to unintended consequences.
Income Tax And Gifts
The transfer or gift will be deemed a sale at the fair market value. If there is a capital gain or capital loss, this must be included on your income tax return in the year the gift was made. Note, that the principal residence is excluded from the tax on capital gains.
The gift means you will have to pay income tax on capital gains even though you did not received any payment. Therefore, you must plan for the income tax bill that will be due by April 30th of the following year.
Income tax is only one of the considerations.
Loss of Control
When you give away something the ownership changes and you will not have control over the property after the gift. You also can’t attach conditions to the gift that give you the right to take the property back. Doing so could mean that the property given away could end up back in your estate and subject to probate.
Consider this example. Assume you have a portfolio of securities, a business, and commercial property. You live comfortably on your investments in securities and decide to give away your business and commercial property to your children.
If any of the investments fail or the portfolio no longer generates enough income, you cannot get the property you gifted back.
What Should You Do?
Estate planning can be a complicated affair. Anyone with personal property considering estate planning or gifting it away to avoid probate should seek the advice of an estate lawyer and a CGA, CA, or financial planner.