Lately, I am seeing more “Acts of Donation” than ever.  Usually, a well-meaning (but uninformed) attorney, notary, CPA or family friend has convinced an elderly person that the best thing to do is to donate their property to their children.  The main reasons for touting this recommendation are:  1) it avoids a succession, 2) it allows them to qualify for Medicaid, and 3) it decreases taxes by removing the asset from the donor’s estate.

Although some of this may be true, usually after a consultation with me the donor wishes they had their property back.  Here are the downsides of donating property that are not always revealed:

  1. Basis issues.  When you donate something, your donee gets your basis.  In other words, if you inherited your home through your dad’s succession and, at the time dad died, it was worth $50,000 but it is worth $250,000 today—your basis is $50,000.  If you donate it to your kids, their basis is $50,000.  When they sell it for $250,000, they will pay capital gains tax on the $200,000 “profit.”  Instead, had the kids inherited that property through succession, their basis would have been the full $250,000 “fair market value” as of the decedent’s date of death.  Since Louisiana Inheritance taxes have been fully repealed as of July 1, 2004, having a highly-appreciated home pass through the succession is worth every penny of the small cost of doing a simple succession.
  2. Gift taxes.  You can donate $14,000 (2014 figure) per year to each donee before you are subject to filing Louisiana and Federal gift tax returns and possibly having to pay gift tax.  Gift tax is based on the fair market value, not the cost basis.  In the example above, the donor made a $250,000 taxable gift to the children.
  3. Medicaid issues.  First of all, Medicaid does not look to the primary residence as a “countable resource” when determining Medicaid eligibility.  Retaining ownership of your home will never disqualify you from Medicaid (provided the equity does not exceed $500,000).  Medicaid will look at the Act of Donation as a “transfer for value” and could cause you to be ineligible for Medicaid benefits for 5 years!
  4. Homestead exemption.  If you donate all of your ownership, and do not retain a usufruct, you cannot continue to qualify for the homestead exemption.  Depending on your millage rate, that donation could cost you an additional $1,300 per year or more in property taxes!

Before you decide to donate any item of significant value, come see me and let’s talk about it.  It very well may be the right thing to do, but don’t you want to be sure?  Remember, donations are irrevocable gifts.



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