Giving Assets To Your Children Prematurely Can Cause Serious Problems

Sometimes parents will transfer title of their assets while they are still living to their adult children, thinking it will make things easier. For example, doing this would prevent the court from controlling the assets if the parent became incapacitated, and it will avoid probate when the parent ultimately die. And while there are very good and valid tax reasons to transfer some assets now, it can also create problems.

If you need to know the proper timing of giving gifts out of your estate while you are still alive, contact Sjoberg & Tebelius, P.A., in Woodbury, Minnesota, and schedule a consultation with one of our lawyers. Call us at 651-315-8856. Our clients come from throughout the state and western Wisconsin.

How Can A Gift Be Given Too Soon?

First, when you give away an asset, it’s gone. You may think your children will give it back to you if you change your mind, but they don’t have to, and things can change in families when money is involved. They could sell the asset against your wishes, they could lose it to creditors or they could be influenced by a spouse. If you outlive your children or they divorce, a daughter- or son-in-law could end up owning the asset. Would she or he give it back to you?

Second, there could be tax problems. Currently (as of 2025), when you give someone other than your spouse more than $19,000 in one year, a gift tax may be involved. And when your children sell the asset, there will probably be a capital gains tax. That’s because, under current law, the asset would not receive a stepped-up basis like it would if it were inherited upon your death.

The basis of an asset is the value used to determine gain or loss for income tax purposes. Most of the time, the basis is what you paid for the asset. If you give an appreciated asset to your children while you are living, it keeps your old basis (what you paid for it). But if they receive it as an inheritance after you die, it may receive a new stepped-up basis as of the date of your death.

Let’s look at an example. Let’s say Bob purchased his home for $100,000, and today it’s worth $350,000. He gives it to his son Tom, who sells it for $350,000. Because Bob transferred title to Tom while he was living, the house keeps Bob’s original cost basis of $100,000. That means Tom pays capital gains tax on the $250,000 gain.

However, if Tom receives the house as an inheritance after Bob dies instead of as a gift while Bob was living, the property receives a new stepped-up basis to the market value as of the date of Bob’s death, which is $350,000. Now when Tom sells the house for $350,000, there is zero gain on the sale and, therefore, no capital gains tax to pay.

Substantial gifts made within the last five years (the current lookback period) may also disqualify you from receiving Medicaid and SSI (Supplemental Security Income) benefits for a significant period of time.

In short, gifting can be a great way to reduce estate taxes if your estate is large and you can afford to give away an asset. But never give away an asset you may need later. And make sure you consult with an experienced professional before making a substantial gift.