You might think, instead of writing a will or creating a trust, why not just give away your assets now and save everyone the trouble later? It sounds simple – no lawyers, probate or other formalities – just a generous hand-off to your loved ones.
However, such an approach can backfire in ways you might not expect. Here is why gifting away assets shouldn’t substitute a proper estate plan.
You lose control of your assets
Once you give away assets, the new owners can do as they please with them. They can sell or transfer them to third parties without your consent or permission. Additionally, the assets are not protected from creditors or lawsuits if your loved one runs into legal problems.
It can trigger unintended taxes
If you give an asset away, like your home or investment property, your loved ones take it at the price you originally paid. Should they sell it later, they could owe a lot in taxes on the profit. You may also be subject to taxes if you exceed the annual or lifetime gift tax exemptions.
Medicaid may count it against you
If you require long-term care and apply for Medicaid within five years of giving away significant assets, those transfers may be counted against you. This could delay your eligibility and leave you paying out of pocket for costly care.
While it’s okay to give away some of your assets to your loved ones, gifting should only be one piece of a larger, well-thought-out estate plan. You want to protect your financial well-being while you’re alive and your family’s future and legacy when you’re gone.
Take the time to build a solid estate plan and seek legal guidance to understand how everything works. Knowing that you did things right and have the necessary plans when the time comes can give you invaluable peace of mind.