Returning Gifted Stocks to Original Owner (Tax/Basis Question)

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giftingstocks
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Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by giftingstocks »

Hello all,

I am new to this forum and am grateful to learn that something like this exists! I recently became Power of Attorney for my dad, and have been on somewhat of a crash course in retirement investing, Medicare/Social Security rules, etc. ever since.

Due to some recent erratic behavioral changes and financial decisions by my dad, an attorney advised us to move as many assets as we can without tax penalties out of his name and into a separate account in my or my sister's names (my POA allows this, and it is in line with his intent in his will), so that we can make sure that they are still available for any future care needs that he might have.

My question is if we move appreciated stocks out of his name and into one of ours and do not sell them, could we gift them back to him at some point down the road when things have settled down, thereby potentially avoiding any capital gains tax if they ultimately pass to us under his will?

I know that we would have to file gift tax returns for the gifting transactions, but neither my dad nor I anticipate ever exceeding the lifetime exclusion amount for gifts and therefore I do not think either of us would incur gift tax liability as a result.

Any advice that you have would be much appreciated!
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Nate79
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by Nate79 »

An elder care attorney recommended you do this?
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giftingstocks
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by giftingstocks »

A guardianship attorney recommended that we remove any liquid assets from his name until his situation stabilizes (he has a relapsing medical condition and has already lost about $40,000 to scams over the past few years but she indicated that he may still not be "bad enough" for guardianship, which seems crazy to me), but I wasn't thinking specifically about his stocks at that time since they have significant built-in gains. Now though, I am wondering if I gift them to myself and then gift them back to him later on, if that would change how they are eventually taxed either when he sells them or if my sister and I inherit them.

Thank you for your time and advice.
Last edited by giftingstocks on Tue Mar 30, 2021 1:39 pm, edited 1 time in total.
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ipdiddly
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by ipdiddly »

Assuming dad is competent to sign legal documents, you could create a revocable trust and place all his assets in the trust. Then the trustee (you or sibling or both) can manage the assets. Taxes would be paid under his SSN until he passes. Then you would need an EIN for the trust account. With a revocable trust, he still owns the assets so they are eligible for step up basis upon his passing. Bear in mind, with a revocable trust, he has the right to dismantle the trust or appoint a new trustee (like himself) at any time. So one needs to take account of how erratic his behavior might be.
I'm not suggesting this is necessarily the best route. It is simply an option to consider.
If his mental state is particularly bad, you may need to have a guardian (you or sibling or other) appointed.
Gill
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by Gill »

giftingstocks wrote: Tue Mar 30, 2021 9:54 am My question is if we move appreciated stocks out of his name and into one of ours and do not sell them, could we gift them back to him at some point down the road when things have settled down, thereby potentially avoiding any capital gains tax if they ultimately pass to us under his will?
The general rule is that if you transfer appreciated assets to another and you inherit those from the donee within a year after the transfer there is no stepup in basis. That rule would seem to apply to this situation. I'm surprised none of the advisors you consulted were familiar with this rule.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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Minority Opinion
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by Minority Opinion »

Consult with an attorney.

That being said, one of the ways I've seen families address this situation is for the parent(s) to gift assets to the children and then the children establish a trust for the benefit of the parent(s) during their lifetime and fund it with the gifted assets.

As there are obviously tax and Medicare implications to doing something like this, and differences between states, consult an attorney.
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by Gill »

Minority Opinion wrote: Tue Mar 30, 2021 1:33 pm Consult with an attorney.

That being said, one of the ways I've seen families address this situation is for the parent(s) to gift assets to the children and then the children establish a trust for the benefit of the parent(s) during their lifetime and fund it with the gifted assets.

As there are obviously tax and Medicare implications to doing something like this, and differences between states, consult an attorney.
Not sure what this accomplishes. There would be no stepup in basis with this approach.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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giftingstocks
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by giftingstocks »

Thank you all so much for your advice! It has been a difficult situation to get a handle on, and he is a Canadian citizen (US permanent resident) on top of that and apparently they don't recognize my US POA so that has added an additional layer to contend with.

The doctors say he is "borderline" incompetent - he suffers from alcoholism and has Wernicke-Korsakoff syndrome, so basically he is not competent when he's drinking (which he can't stop doing after multiple stints in rehab), but when we try to get him to go to assisted living he is agreeable until he sobers up, at which point he threatens anyone who tries to keep him in assisted living (and threatens to revoke my POA if I don't help him leave), then goes home because he's technically allowed to check himself out, and relapses again.

For some of the reasons that you mentioned (him potentially revoking the trust, the fees to set up and possibly to dismantle the trust, as well as him possibly needing Medicaid soon if he keeps drinking and progresses to Alzheimer's), the attorney recommended gifting the assets so that we can preserve them if he needs them, and also start the 5 year Medicaid lookback period (doctors have said that Alzheimer's is likely if he does not stop drinking, but physically he is young and in pretty good health, so if we can convince him to stay - sober - at his current assisted living facility he may never end up needing a high level of care).

As Gill mentioned, I would like to preserve the step-up in basis if we do end up inheriting the stocks as we stand to do now under his will, and I am not sure if gifting them to myself and then back to him later on would affect this.
Gill
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by Gill »

giftingstocks wrote: Tue Mar 30, 2021 1:54 pm
As Gill mentioned, I would like to preserve the step-up in basis if we do end up inheriting the stocks as we stand to do now under his will, and I am not sure if gifting them to myself and then back to him later on would affect this.
I thought my answer covered this. I see no problem in the gift to you and your sister and then the later gift back other than the fact the stepup would be lost if he died within a year of the transfer back to him.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
bsteiner
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by bsteiner »

ipdiddly wrote: Tue Mar 30, 2021 1:23 pm Assuming dad is competent to sign legal documents, you could create a revocable trust and place all his assets in the trust. Then the trustee (you or sibling or both) can manage the assets. Taxes would be paid under his SSN until he passes. Then you would need an EIN for the trust account. With a revocable trust, he still owns the assets so they are eligible for step up basis upon his passing. Bear in mind, with a revocable trust, he has the right to dismantle the trust or appoint a new trustee (like himself) at any time. So one needs to take account of how erratic his behavior might be.
I'm not suggesting this is necessarily the best route. It is simply an option to consider.
If his mental state is particularly bad, you may need to have a guardian (you or sibling or other) appointed.
If he may revoke it alone, it won't work, for the reason you mentioned. It would have to be revocable only with the consent of someone else. He would have to carefully consider the selection of the someone else.
Gill wrote: Tue Mar 30, 2021 1:35 pm
Minority Opinion wrote: Tue Mar 30, 2021 1:33 pm Consult with an attorney.

That being said, one of the ways I've seen families address this situation is for the parent(s) to gift assets to the children and then the children establish a trust for the benefit of the parent(s) during their lifetime and fund it with the gifted assets.

As there are obviously tax and Medicare implications to doing something like this, and differences between states, consult an attorney.
Not sure what this accomplishes. There would be no stepup in basis with this approach.
They could give him a general testamentary power of appointment. That would result in a basis step-up.

In some states such as New York it wouldn't be subject to his creditors (ignoring the possibility it could be treated as a step transaction). However, in other states it would be subject to his creditors regardless of whether he exercises it, and in still other states it would be subject to his creditors if he exercises it (even if other than in favor of his estate or creditors) but not if he doesn't exercise it.
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giftingstocks
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by giftingstocks »

Gill - thank you so much, I re-read your post and I see, it does answer my question exactly. So it seems that gifting them to myself and back to him would not necessarily cause a change in basis/taxation if I don't sell any, except if we inadvertently run afoul of the 1-year rule with the latter gift.

Thank you to everyone who replied - it has been difficult to try to understand all of the rules and figure out how best to proceed, so I really appreciate you taking the time to read and respond to my post!
Gill
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by Gill »

giftingstocks wrote: Tue Mar 30, 2021 2:14 pm Gill - thank you so much, I re-read your post and I see, it does answer my question exactly. So it seems that gifting them to myself and back to him would not necessarily cause a change in basis/taxation if I don't sell any, except if we inadvertently run afoul of the 1-year rule with the latter gift.

Thank you to everyone who replied - it has been difficult to try to understand all of the rules and figure out how best to proceed, so I really appreciate you taking the time to read and respond to my post!
There are, of course, other risks in making such a transfer. Although possibly remote, there is the risk of one of you dying before your father, having a judgment creditor of yours attach the assets or a divorce. As mentioned earlier, the big risk is the death of your father within one year of the transfer back to him which would eliminate the stepup possibility.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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giftingstocks
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by giftingstocks »

Yes - true - I guess I do need to take those factors into consideration before making a final decision. (Luckily?) between both of my parents' situations I don't foresee ever having the time to get married so at least divorce is one issue I can cross off the list! :?

I just found the IRS guidance regarding the 1-year rule, and it sounds like it only applies to the person who gifted the assets (me) and not others who stand to benefit under a will (i.e. my sister), so in theory I might be able to disclaim my half of the stocks and she could still benefit from the step-up in basis if my dad happened to pass within a year of receiving the stocks.

"Appreciated property. The above rule doesn't apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis."
Gill
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by Gill »

giftingstocks wrote: Tue Mar 30, 2021 3:00 pm
I just found the IRS guidance regarding the 1-year rule, and it sounds like it only applies to the person who gifted the assets (me) and not others who stand to benefit under a will (i.e. my sister)..."
Correct.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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giftingstocks
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Re: Returning Gifted Stocks to Original Owner (Tax/Basis Question)

Post by giftingstocks »

Thank you!!
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