The Hidden Tax Traps in Lifetime Gifts

Avoiding the Hidden Tax Trap in Lifetime Gifts

We love the idea of “getting things done.” We declutter, we consolidate, we “get the house out of Mom’s name.” But sometimes, our efforts to simplify make things more complicated, and more expensive, than we ever intended.

The Illusion of “Getting Ahead”

Families often rush to transfer property to avoid probate or protect it from potential nursing-home costs. The intentions are good but those well-meaning transfers can create a massive tax bill down the road.

Let’s take the story of Kate. She’s 70, retired, and owns a $2 million vacation home in South Dakota that her mom gave her years ago. When Kate’s mom transferred that house during her lifetime, she also transferred her very low tax basis of $200,000, what she originally paid for it plus any improvements.

That small detail has big consequences. If Kate sells the home today, she owes long-term capital gains tax on $1.8 million of gain. If her mom had waited to pass it down through inheritance instead, Kate’s tax bill would have decreased significantly. And if Kate holds onto the home until her own death, her kids would owe no capital gains tax at all if they sold it immediately.

That’s the power of the step-up in tax basis, a tax rule that resets the property’s tax basis at death to its fair market value, often wiping out decades of unrealized gain.

When an Irrevocable Trust Doesn’t Make Sense

Irrevocable trusts can protect assets from creditors, preserve wealth for future generations, and in certain high-net-worth situations, help reduce estate taxes. But for most people, they’re unnecessarily complex, and sometimes harmful.

Take Kate again. Her estate is worth $7 million. Even if it doubled, she’d still be under the current federal estate and gift tax exemption of roughly $14 million per person. Moving her $2 million home into an irrevocable trust wouldn’t save her from estate taxes because she was never going to owe them in the first place. What a transfer to an irrevocable trust would do is lock in that low $200,000 tax basis and create a huge taxable gain if the trust ever sold the property.

When Simpler Is Smarter

There’s this quiet pressure to have the most sophisticated plan possible, a multi-trust setup, complicated asset transfers, and maybe even a fancy binder to organize it all. But estate planning isn’t about keeping up with what everyone else is doing. It’s about finding what actually fits your goals, your family, and your financial reality.

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