Unintended Consequences
/As with many others during this time at home, my husband and I have been doing some home updates. We added a kitchenette to our basement that included a few glass cabinet doors. After installation, we noticed some loose glass on one of the doors, so we added a strip of silicone to all the doors to ensure the glass didn’t fall out. A few days later, we went back to load the cabinets and discovered the clear silicone had apparently reacted to the white cabinet paint and caused the paint on the cabinets and doors to turn bright yellow! Ugh!
When working with clients, sometimes I come across situations where a seemingly insignificant change has a huge impact. The unintended consequences can result in big hassles down the road.
It is not uncommon for an elderly person to think that transferring the title of their home to their adult child will make for a smoother transition at death. In reality, though, the cost basis (how much was paid for an asset) follows a gift made during lifetime, whereas at death the cost basis gets stepped up to the value on the date of death. What does all this mean? By adding someone to the title of an asset, you have made a gift. Therefore, the original owner’s basis transfers to the new owner. When the new owner sells the asset, they will owe taxes on the profit (sales prices less cost basis). If, however, the asset is inherited, the cost basis is now the current value. If sold shortly thereafter, taxes may be avoided all together.
Keep in mind, as well, when you gift more than $15,000 in value to someone in a calendar year, you must also file a gift tax return with the IRS. Generally, there is no tax due by either party—the return is informational—but the gift must be reported.
To avoid unintended consequences and hassles in the future, be sure to seek professional advice before changing the title on assets (a house, bank or investment accounts, vehicles, etc.). And while you are doing that, my husband and I will be working on getting our cabinets back to white!
- Juli Erhart-Graves, CFP®, Worley Erhart-Graves Financial Advisors
