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I know that gifts given to parents by their children within one year of their death are not eligible for cost-basis step up upon inheritance by those same children. I understand that this is to close a loophole which would allow children to give their highly appreciated assets to their terminally ill parents and avoid capital gains taxes on assets which they will very soon inherit once again.

My question is, if you anticipate your parent will survive longer than one year from the time you gift your assets to them, is it legal to do this?

Daniel
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  • I'm voting to close this question as off-topic because asker is clearly only interested in the legal aspect of the question not it's actual financial impacts. This should be on the law stack. – quid Nov 30 '16 at 22:29
  • I disagree, the financial impacts on the parents are not what he is asking about, but it still affects his own finances. – NL - Apologize to Monica Nov 30 '16 at 22:47
  • @quid I'm asking if this is a legitimate tax-reduction strategy. Aren't there many such questions on this site? – Daniel Nov 30 '16 at 22:50
  • You're asking if it is legal for you to reap the benefit of a cost basis step up by dubiously utilizing gift tax rules to transfer assets to your parents that you could reclaim after they pass. You're asking strictly about the law in your question and you reiterated that you're only interested in the legality below in a comment. In my opinion there's a strong argument to be made that the gift transfer to your parents was done fraudulently because it's not actually a gift, but I'm not a lawyer. – quid Nov 30 '16 at 23:09
  • @NathanL, the financial impact would be on Daniel if his parents spend his assets while they own them which may be required for qualification in to certain programs offered to elderly folks in the US. – quid Nov 30 '16 at 23:11
  • @quid I don't know if this is "dubiously utilizing gift tax rules." I know it's utilizing gift tax rules and the question is whether this is a dubious usage of them. I'm not a regular user of this particular SE site but I'm not really seeing how this question is different in form from (e.g.) this highly upvoted question. – Daniel Nov 30 '16 at 23:47
  • @quid The updated answer does begin to address my question. I'd still like more detail, though – Daniel Nov 30 '16 at 23:49
  • It's dubious use of the gift rules because it's not actually a gift. The question you link relates to structuring your own assets to mitigate tax liability, this is about whether or not your specific "gift" transfer is legal. Anyway, I think this question is offtopic and you're asking the wrong people. That's all. – quid Nov 30 '16 at 23:57
  • @quid Tax law questions are on-topic here. – Ben Miller Dec 01 '16 at 00:06
  • @BenMiller, I didn't say tax law questions aren't on topic. I said this question isn't on topic. He's not asking about taxes, he's asking about the legality of this use of gift rules. He's asking whether or not transferring something to someone using gift rules when it's not really a gift is legal. This is a question of "what constitutes fraud." I must be reading something you're not or the other way around. – quid Dec 01 '16 at 00:12
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    @quid You're making the assumption that the IRS does some kind of subjective analysis of whether a "gift" is really a gift. Whether or not they do that is really the crux of the question. Just because it's not a "gift" in the colloquial sense of the word doesn't necessarily mean it isn't a gift in the legal sense. You're framing the question as "Is this lie bad enough to constitute fraud?" The question is intended to be read as "Is this a lie at all?" – Daniel Dec 01 '16 at 00:16
  • @quid In other words, you're working on the assumption that the answer to my actual question is obvious (it's not permitted) and I must be asking a deeper question when in reality I'm just an ignoramus. – Daniel Dec 01 '16 at 00:18
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    The answer as it was originally state just commented on the fact that the parents would have to spend it down before being eligible for Medicaid. That's fine and a perfectly legitimate and helpful bit of information to include in an answer. I'm glad to know it and it's clearly directly related to my question. But it didn't address the question as asked. Now it addresses the question but doesn't provide any sources for the assertions included. – Daniel Dec 01 '16 at 00:23

1 Answers1

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When you gift them the property it becomes their property. Which means if they become ill they will have to use those assets before they are eligible for Medicaid.

You can gift anything you want. If the IRS detects that you did it to avoid taxes, they will not allow the tax advantage.

If you gift it with conditions: they can't sell it, or donate it, or give it to somebody else in their will; then the transaction is a sham.

If you give it and then 5 years later your parents have to go into a long term care center, and they start to run out of money, the government will require them to be broke before they can have their care paid by Medicare. Telling the government that you are holding it for their child will not prevent them from having to sell it.

mhoran_psprep
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  • So you're saying the answer is "yes, it is legal"? This statement doesn't differentiate between gifts given within a year of death and gifts given more than a year before death so it doesn't really prove anything. – Daniel Nov 30 '16 at 18:27
  • He's saying, legal or not it might change your parents' finances in ways that you're not appreciating that may necessitate the spend down while they're alive of the assets you transferred. Additionally, after their passing, your assets may get caught up in their estate also possibly causing a spend down that you're not considering. – quid Nov 30 '16 at 19:06
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    @quid So it doesn't answer the question. – Daniel Nov 30 '16 at 21:58
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    Could you elaborate more on the second paragraph? That's the detail I'm interested in learning about. – Daniel Nov 30 '16 at 23:48
  • see this answer: http://money.stackexchange.com/a/71693/5414 – mhoran_psprep Dec 01 '16 at 13:36