Probate Avoidance through Lifetime Gifting

Opting to gift your assets to your beneficiaries during your lifetime can appear as an effortless way to sidestep probate. However, the process of gifting involves certain complications.

The Timing Challenge of Gifting

Gifting to avoid probate presents two main dilemmas:

  1. Too Much Too Soon: If you gift too much of your property too early, you might end up not having enough for your needs.
  2. Not Enough in Time: Predicting the time of death, except in the cases of terminal illness, is not possible. This makes it difficult to time your gifts accurately to avoid probate.

The Federal Gift Tax Consideration

When planning gifts to evade probate, you should keep the federal gift tax in mind. Currently, the U.S. tax code imposes taxes on transfers (or gifts) made during a person’s lifetime, only after they exceed the Federal Gift Tax Annual Exclusion amount, which is $17,000 for 2023. Notably, if married, couples can gift up to $34,000 in a calendar year to any one individual without incurring any tax liability.

Gifting and Capital Gains: An Overlooked Aspect

Gifting to avoid probate may also lead to capital gains complications. The basis for calculating capital gains tax is the original cost (or “basis”) of the asset. When an asset is gifted, the recipient gets the original cost basis, which could result in higher capital gains tax when the asset is sold. On the other hand, assets transferred upon death get a “step-up” in basis, potentially reducing the capital gains tax burden.

Here’s an example for better understanding:

  • Bob owns stock in XYZ company, which he purchased for $1,000. This is his cost basis. A day before Bob died, he gifted his stocks to Jake. The stock was worth $10,000 per share at Bob’s death. When Jake sells the stock, he will owe tax on $9,000 of capital gains, because the cost basis of the gifted shares was $1,000.
  • However, if Bob had left the stock to Jake in his will, Jake would have received it with a cost basis of $10,000 (its value at Bob’s death). So, if Jake sells the stock for $10,000, he will owe no capital gains tax.

Plan for the Future with Brady Cobin Law Group, PLLC

While gifting assets during one’s lifetime might seem like a straightforward way to avoid probate, it poses numerous practical challenges and potentially loses the benefit of a stepped-up basis. However, with thorough and expert estate planning, these issues can be effectively managed.

Probate can indeed be bypassed with effective estate planning, allowing you to meet other important goals as well. For expert advice tailored to your situation, get in touch with Brady Cobin Law Group, PLLC, your trusted North Carolina Estate Planning Attorney, for an initial consultation. Contact us today at (919) 782-3500.