Clients often talk about transferring property either to other individuals, into a trust, or into a pass-through entity for a wide array of reasons. One of the top reasons is typically to avoid probate. Another reason can be for tax purposes. However, with the change in Minnesota law, there may now be adverse consequences to the individual’s original intent.
Gifting assets can be appropriate in certain circumstances but the donor must assess his or her specific circumstances to determine if it is truly the right thing to do. Gifting assets during a person’s lifetime removes the assets from his or her estate for probate purposes. Gifting assets during a person’s lifetime also removes the assets from the estate for estate tax purposes… hopefully. However, with the new Minnesota gift tax, if the donor dies within three years of making the MN gift (for gifts made after June 30, 2013), the value of the gift will be brought back into the donor’s estate for purposes of calculating MN estate tax.
Additionally, regardless of when the donor dies after making the gift, gifting assets during lifetime affects the recipient’s basis in the asset. If a recipient inherits an asset at the death of the donor, the recipient receives a step-up in basis on the asset. But, if a recipient receives the asset through a lifetime gift, the recipient receives the original basis on the asset from the donor and will be responsible for the capital gain on the asset if, and when, the recipient sells the asset.
Transfer Into A Pass-Through Entity
In the past, I have discussed the benefit of using a limited liability company in estate planning. While an LLC can be a useful tool in certain circumstances, there are other situations in which this would not be the case. If a MN resident owns non-MN property, an LLC is appropriate to use to avoid probate. However, if that MN resident transfers the non-MN property into a MN LLC, they have now made that non-MN property a MN asset and there can be unfavorable estate tax consequences to such transfer. Depending on the situation, utilizing a revocable trust may be the most effective tool to both avoid probate and minimize MN estate taxes.
It is important to also consider the legal implications on certain transfers and not just the tax effects. With a gift, a donor must remember that the gift is truly a gift and therefore, is not accessible to the donor once it is made. When clients consider gifting assets to get the assets out of his or her estate they sometimes do so with the thought that the recipient will use the assets for the donor’s care if needed. But the recipient has no obligation to do so once he or she receives the gift. The donor must accept that the asset will no longer be his or her own.
It is imperative that clients meet with his or her professional advisers – attorneys, accountants or financial advisors – to discuss the various tax and legal implications of transferring property. If the transfer is not actually appropriate to do and/or is not completed properly, one can find themselves facing unintended ramifications.