Gifting fund shares to parents, chance of inheriting them back

[RunningBum]

Without getting into all of the details, my parents may need fairly considerable financial support in a few years. I've been thinking about how to manage the tax hit, especially since it may come while I'm still trying for an ACA subsidy, and certainly trying to do more Roth conversions.

They are in a low tax bracket, so I can gift them appreciated shares of a mutual fund, and let them incur the tax liability when they need to share. I'm thinking to start this year, so I can gift $30K a year (15 to each parent, and I'm not married) and they'll have it when they need it.

Then I thought, I should ask them to put me as beneficiary, so I get anything they don't use back. Would I get stepped up basis then? It wasn't my intent to take such advantage to avoid LTCGs for myself, but if it's a legal loophole, why not? My expectation would be that they use it all, but if they don't I definitely want it back. It would be in a new account for them, so it wouldn't muddy up any other beneficiary settings they have on other accounts. And of course they can name whoever they want, but I'm sure they'd understand and name me. My brother has full power of attorney on their financial accounts and I'm sure he'd agree to this.

So I just want to know, is this an allowable loophole, to gift MF shares, and get a stepped up basis if I inherit them back? If they can't do it specifically on those shares, what if they sold them when they received the gift, took the LTCG at the likely 0% rate for their status, and invested in a different fund that I might eventually inherit?

 

[pb4uski]

I don't see why not, but it doesn't seem right so there may be something out there on it... otherwise one could gift shares to someone on their deathbed and get a stepped up basis and there must be something that prohibits that I would think.

 

[RunningBum]

I don't see why not, but it doesn't seem right so there may be something out there on it... otherwise one could gift shares to someone on their deathbed and get a stepped up basis and there must be something that prohibits that I would think.

That's what I was worried about too. My folks aren't on their deathbed, but you never know, and in their mid 80s things can change quickly.

I'm trying to search, but I'm just getting hits and gifting shares, and on inheriting shares, but so far haven't found anything that covers them together like this. I'm going to keep looking as this does seem too good to be true.

Worst case, it's not the end of the world if I get the old basis back when I got them back.

I would probably recommend that they sell the gifted shares on receipt since 80somethings would be better off with a less aggressive investment, so I probably wouldn't get back the same shares, and perhaps less than originally gifted.

 

[pb4uski]

Found this... not totally on point, but getting warmer:

The second death-bed transfer rule affects the so-called step-up in basis at death by disallowing inheritors to receive this benefit if they gifted the asset to the decedent within the last year. To see how this works, consider that generally any asset includible in a decedent’s estate receives an adjustment to its basis to the fair market value at the time of death (or six months after if the alternate valuation date is used). For example, if Jack buys XYZ stock for $10 per share and dies five years later when the stock is valued at $100 per share, the cost basis of $10 per share is “stepped up” to the fair market value at death of $100 per share, effectively wiping out the stock’s built-in capital gain. This is a boon for inheritors, since the asset’s associated income tax bill is eliminated. However, if Jack’s wife, Diane, gifts the XYZ stock to Jack less than one year before he dies, and Diane inherits the asset back under Jack’s will, no step-up in basis is allowed.3...

3 Many (and perhaps most) estate planning lawyers believe that there are easy ways to get around this rule. Unfortunately, the Internal Revenue Service has not issued regulations or guidance regarding this rule, so anyone trying to circumvent it should proceed with some caution. A tried-and-true way, however, is to simply make a gift that will not come back to the donor within a year by, for example, making a gift that will ultimately go to anyone other than the original donor.

https://www.bbh.com/en-us/insights/death-bed-tax-planning--some-basics-32690

 

[pb4uski]

Others:

https://www.forbes.com/sites/baldwi...e-these-steps-now-to-save-later/#41166a395321

https://www.farmcrediteast.com/knowledge-exchange/Blog/todays-harvest/do-deathbed-gifts-really-work

https://pollockfirm.com/deathbed-gifts/

 

[Retireby45ish]

I believe you can do this but it has to be a year before their death. Otherwise doesn’t count.

Here is the article I found. I recently asked about this in a tangential way in a thread that’s a few posts down saying something like “how to sell winners without being mad” it’s something not usually used but I think it could be really beneficial if you have a lot of LTCG and you time it right and make sure you trust them 100%.

Edit: Just realized pb4 beat me to it as usual!

https://www.bbh.com/en-us/insights/...ing-taxes-by-giving-back-to-mom-and-dad-30972

 

[Souschef]

From Putnam investments website:



Gift low-basis assets to older family members. Conversely, there may be a benefit to gifting appreciated assets to older family members. The premise behind the gift is that the older family member would, in turn, leave the asset to the person who made the gift. The cost basis of the appreciated asset would be stepped-up at death sheltering the appreciation from capital gains taxes.*
When making a gift to an older relative, there are factors to consider such as long-term care planning. Gifted assets would generally be subject to the asset test for Medicaid purposes. Also, these assets would be subject to claims from creditors, and they would have no legal obligation to direct the asset back to the person who made the gift in their estate plan. (Note: Under IRC Section 1014(e), the stepped-up basis rules do not apply to property acquired by the decedent through gifting within one year of death.

 

[RunningBum]

Thanks folks, that's great news, I really appreciate you all finding these sources!

 

[ERD50]

So it sounds like RB's plan makes some sense for him. He can start this gifting plan now, and only the last year's gift would come back to him stepped up. Since the parents aren't on their death bed now, but may need financial support that RB is willing to provide, it all seems to work out. And if he starts now, it's even possible that no gift will be required in that final year (if foreseeable) anyhow.

And he's no worse off if a single year's gift does not get stepped up, he can still control his income for ACA if he needs to, just don't sell those non-stepped up shares - taxes would only be due if/when sold. I don't really see any downside, if he was planning to gift anyhow. He might as well get some legal tax benefit for the good he is doing.

-ERD50

 

[bizlady]

Can you set up the money in a new account and make it joint with your parents and yourself? Not sure if the money you are gifting is in an IRA, but this might be a way to get your money back if they do not use it--stranger things have happened when parents die...

 

[RunningBum]

Can you set up the money in a new account and make it joint with your parents and yourself? Not sure if the money you are gifting is in an IRA, but this might be a way to get your money back if they do not use it--stranger things have happened when parents die...

It's not in an IRA. I don't want to muddy anything with a joint account of any kind with them. My brother has full power of attorney and he should be able to set up the account with them. I've already told him my plan. I completely trust him.

I know I can gift shares to them because I've done it with my son, when he had lower income and could sell them with the 0% LTCG rate. I have absolutely no expectations of getting those back. It was just a matter of gifting him money in the most tax efficient way, same as I'm doing with my parents.

My hope is that they live long enough to need and use the money, and I won't get anything back. If they die earlier, I was just trying to understand what would happen tax/basis wise if I got some back.

 

[cargetter100]

OP, you are asking for some pretty detailed financial advice (i.e. how to avoid certain tax issues/ACA problems etc.), yet you state you don't want to provide any details.

Why are your parents in such a dire state of financial need? If they are spend-a-holics the LAST thing you should probably be doing, is giving them any assets directly.

If as their child you feel obligated to provide them with financial support, don't give them money. Don't give them assets. Pay their rent, utilities, health insurance, car insurance, or whatever other necessities they might actually need directly. I.e. if they have a bill they can't pay, and you think it's your obligation to pay it, then pay the bill directly. If you give them assets then they will magically use those assets up and still be right where they started.

 

[cargetter100]

That's what I was worried about too. My folks aren't on their deathbed, but you never know, and in their mid 80s things can change quickly.

I'm trying to search, but I'm just getting hits and gifting shares, and on inheriting shares, but so far haven't found anything that covers them together like this. I'm going to keep looking as this does seem too good to be true.

Worst case, it's not the end of the world if I get the old basis back when I got them back.

I would probably recommend that they sell the gifted shares on receipt since 80somethings would be better off with a less aggressive investment, so I probably wouldn't get back the same shares, and perhaps less than originally gifted.

Not being moralistic at all here, but the reality is you don't think your elderly parents can handle money. At least given the complete dearth of any explanatory details you've chosen not to provide. You think they will run out of money in their 80's. The LAST thing you want to do is give assets to people who are already financially incompetent, because the older they get, the more likelihood they will lose what little financial competence they still have.

You're trying to do things "backwards." At this point in their lives, they should not be accumulating more assets nor should you be their enabler.

You're not going to feel too great if you (for instance) gift them $30k/year for the next ten years, only to find out later on they've donated it all to some televangical ministry behind your back, or perhaps bought 10,000 MY Pillows. Or George Foreman grills. Well I hope you get the point.

 

[Dash man]

That money you would give them would disappear quickly if one of them went into a nursing home. It would have to be spent down before Medicaid kicks in.

 

[RunningBum]

That money you would give them would disappear quickly if one of them went into a nursing home. It would have to be spent down before Medicaid kicks in.

OK, that's a really good point. Just because she's not staying at a place that takes Medicaid now doesn't mean we won't look at that in the future. Maybe I shouldn't start gifting now, but instead wait and see what the best course is when they actually need money.

Thanks for this, and thanks to cargetter for prying that info out of me.

 

[RunningBum]

Oh, I see this post didn't go through. As it turns out, Dash Man showed that maybe I should take some advice on whether or not to do it.
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Sorry, cargetter, but those details just aren't pertinent to the specific question I asked, about what happens when you gift appreciated stock shares to someone, and get them back upon their death.

It's not yours or anyone else's business if they are blowing money (they aren't, I am quite certain) or anything else you asked. Mom needs memory care now. Places that take Medicaid seem to be scarce to non-existent where they are, so now their financial plan breaks if she lives more than 3-5 years (there is one pending question my brother and I are investigating, thus the uncertainty on how long). She likely won't live that long but she could, so I want to be prepared to step in.

I have no interest in getting into details on the medicaid decision, or what all they might spend their money on, or who should help them, or where they should live. Yes, it could backfire on me, but I judge that possibility to be very low and I'm willing to take that risk. I didn't really even want discussion on the best way to get them money. I certainly didn't want to have those distracting from the question I asked, and I thank everyone for keeping to answering that question.

 

[Dash man]

Oh, I see this post didn't go through. As it turns out, Dash Man showed that maybe I should take some advice on whether or not to do it.
---

Sorry, cargetter, but those details just aren't pertinent to the specific question I asked, about what happens when you gift appreciated stock shares to someone, and get them back upon their death.

It's not yours or anyone else's business if they are blowing money (they aren't, I am quite certain) or anything else you asked. Mom needs memory care now. Places that take Medicaid seem to be scarce to non-existent where they are, so now their financial plan breaks if she lives more than 3-5 years (there is one pending question my brother and I are investigating, thus the uncertainty on how long). She likely won't live that long but she could, so I want to be prepared to step in.

I have no interest in getting into details on the medicaid decision, or what all they might spend their money on, or who should help them, or where they should live. Yes, it could backfire on me, but I judge that possibility to be very low and I'm willing to take that risk. I didn't really even want discussion on the best way to get them money. I certainly didn't want to have those distracting from the question I asked, and I thank everyone for keeping to answering that question.

For what it’s worth, we had heard Medicaid beds were hard to find around us. My wife’s stepmom is in one and has been going on two years. Her Dad is likely going to be her roommate soon, another Medicaid bed that was available. We didn’t have to look too hard, and it’s really a nice place run by the Lutheran Church. My mother-in-law is in assisted living in Florida and may also need to move to a nursing home before long. She still has about two years of money left to spend, then will need Medicaid.
Best wishes for your parents.