Stepped Up Basis Tax Solution: STOP Gifting Your Assets to Build Wealth

Hey everyone, welcome back to We're Talking Money. I'm Phil Clark at OmniStar Financial Group, and today we're going to be talking about something that it's probably not the cheeriest of subjects, but it's very important as it relates to financial planning and wealth management, especially generational wealth. We're talking about gifting highly appreciated assets and why that might not be such a good idea if you do it prior to death.

But before we get into our subject matter, please subscribe to our channel, hit that like button so you never miss an episode of some really great content.

So you've probably heard of this notion that gifting prior to your death is a great way to build generational wealth. It's a great way to pass assets and preserve them, get them to that next generation. Well, not so fast. There's actually some pitfalls when it comes to gifting prior to death, and we're going to talk about those right now.

The first pitfall is capital gains and stepped up basis. Now, what does that really mean? You've probably heard the term stepped up basis, and I'm sure you've heard the term capital gains. When you gift an appreciated asset, you are transferring capital gains tax. It doesn't mean that you get rid of those. You don't have to pay them because you didn't sell the asset, but when you gift prior to death, you've simply transferred them to the next generation.

Now, if the beneficiary of those assets chooses to sell the asset, they're going to pay all the capital gains taxes that you might have paid had you sold the asset. Now, why is that a problem? Well, it certainly does not help build generational wealth. In fact, if 20 or 25% is robbed by Uncle Sam, then you're going in the wrong direction as it relates to wealth building. On the other hand, if we wait and transfer those assets on your death, stepped up basis, no capital gains, much better for building wealth.

Next, let's talk about Medicaid eligibility. Now, this is a hot topic that comes up every year, and that's because people are trying to figure out how to protect their assets and still qualify for Medicaid. Giving all of your assets to the next generation or to someone, that's probably not the answer. In fact, if you start giving your assets, there's actually something called a look back period that could prevent you from qualifying for Medicaid if it's proven that you gave away those assets to impoverish yourself. That's point number one.

Point number two, you can actually keep your asset. There's other ways that are much better when it comes to qualifying for Medicaid. Now, if this is something that's on your mind and you're trying to figure out what to do, how to qualify, call us. We're happy to talk this through with you. Or you might want to reach out to a local elder care attorney. They are adept at this kind of planning. It's what they do. They can show you how to get it done so that you don't have to start giving away all of your assets and you can still qualify for Medicaid benefits.

We're going to round out the show with loss of control. This one is not talked about enough, and some people never really give it any consideration, but if you start giving your assets, you can lose control. And that's because once they're given, they're no longer yours, and that recipient never has to give them back, even if your financial situation changes and perhaps you look back on the situation and decide, maybe I shouldn't have given those, I need them back now because they could help me support my lifestyle.

Even if you and the recipient are in a good place, there's nothing that says they have to give those things back to you. And if they've gone through a financial crisis of their own, even if they wanted to give you the assets, they might not have them anymore. Be careful of giving up your assets before it's time.

So before you start gifting your assets or taking advice that supports this kind of planning, I hope you'll give it a second thought. Making gifts, particularly highly appreciated gifts, before death is not always a great idea. When you start to think about capital gains tax, the loss of stepped up basis, loss of control, all of that can lead to some unintended consequences.

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