We all know that Chuck Norris can kill a rock with two birds, but what does that have to do with reverse gifting? What is reverse gifting anyway? Why should anyone care about it? Well, we are glad that you asked.
What Is Gifting?
In the realm of estate planning, gifting can be used as a completely legal way to reduce inheritance taxes (or death taxes) for your children or other beneficiaries. If you give something away during your lifetime, it is a gift. If you give something away after death, it is an inheritance. Gifting has been successfully utilized in estate planning efforts to minimize the effects of taxation on the estate after passing.
If you happen to be one of the very few persons in the United States whose net worth is actually above the minimum threshold for estate taxes (In 2022, the threshold for federal estate taxes is $12.06 million for individuals and $24.12 million for married couples. For 2023, this limit goes up to $12.92 million for individuals and $25.84 million for married couples) this may be the strategy for you. For most of us, this is not a necessary tactic.
Gifting, Capital Gains, and the Real Estate Market
Over the past several years, the real estate market in the United States has seen considerable growth and consistent increases in value. This can present a shocking tax surprise for the property owners when they sell their high value real estate, even a primary residence.
For example, if a homeowner built their home 30 years ago and sells today for a $750,000 profit, this homeowner will pay capital gains taxes on everything over the first $250,000 for an individual or $500,000 for a married couple. For a married couple, that would be around $50,000 of capital gains taxes even on a primary residence, and even if they are rolling the money straight into a new primary residence. Ouch.
This also applies to a gifted property. If a mother gifts her daughter a rental property with a basis (value at the time of purchase) of $150,000, and the daughter sells this property for $500,000 (current market value) she will be taxed on the profit of $350,000. The basis of the property stayed the same because the property was gifted. However, if the mother passes away while she still owns the rental property, the value of that property will be stepped up to the fair market value at the time of the mother’s death. This is where things can get pretty interesting.
What is Reverse Gifting?
Reverse gifting is the practice of children gifting property to their parent previous to the parent passing. Let’s say a daughter purchased a rental property for $150,000 and it is now valued at $500,000. If she was to gift the property to her mother (not with mother on her deathbed) then when the mother did pass away, the property basis would be stepped up to the current fair market value, and the property could be sold by the daughter without being subject to capital gains taxes.
Reverse Gifting Strategy and Your Estate Planning Attorney
If you are like us, your mind may have exploded with ways that this strategy could go terribly wrong! What if mom remarries and her new husband convinces her to change the will? What if mom gets in a fight with her daughter and spitefully gives the property to another child? The list goes on and on.
This strategy is one to be implemented with the help of a seasoned estate planning attorney and a trust that ensures that for tax purposes, the property now belongs to mom, yet control and decision making power over the property is still in the hands of the rightful owner, the daughter. Reverse gifting can be like Chuck Norris, accomplishing the seemingly impossible, but just like everything else in estate planning, if not done correctly, it can present more problems than solutions.
Conclusion: Reverse Gifting May Be For You
We don’t provide legal advice on this blog, however we would recommend that you schedule an appointment with a qualified estate planning attorney if you think that reverse gifting may be for you.
To listen to our full podcast about Chuck Norris and Reverse Gifting click here.