The holiday season brings with it the joy of giving and receiving gifts. However, gifting at any time can be accompanied by unexpected consequences. Bah humbug, you say? Scrooge? Not really, but it might be good to give a little thought before making a gift under certain circumstances.
What is a gift? Is there really a “no take back” rule? There have been plenty of court cases in Florida addressing these issues, which might have been avoided with better planning. Florida courts have uniformly explained that the essential elements of a gift made during one’s life are (1) present donative intent, (2) delivery, and (3) acceptance by the donee. That means, gifts must generally be unconditional, of a present interest and delivered to the person that is intended to benefit.
A frequent area of gift dispute involves gifts that are really not intended to be complete until the donor dies. In some cases, the donor gives something to a third party to give the intended recipient after the donor dies. The item can be a deed. Since the item is not given to the intended recipient until after death, it does not meet the gift criteria. The gift is ineffective and the asset ends up going through probate.
Circumstances surrounding effort to make a gift can be important. That was made clear in the 1969 case of Sullivan v. American Telephone and Telegraph Company, Inc.
In the Sullivan case, Mrs. Sullivan bought stock and had the stock issued in joint name with her son. Years later and 12 days before she died, she gave the stock certificates to her grandson, who had the same name as her son and purportedly told her grandson that she no longer wanted her son to have the stock when she died. The grandson took the stock certificates to a stockbroker after Mrs. Sullivan died, signed an affidavit that he was the surviving owner and cashed in the certificates. The son sued the stockbroker, claiming he was the rightful owner. The son lost.
The court concluded Mrs. Sullivan never intended to make a present gift of the stock, but only intended it to pass after she died. It explained that she had retained the stock certificates, received all the dividends and that the son had never seen the certificates. It was apparent that Mrs. Sullivan never intended for the stock to be owned by her son until she died, there was no present gift and her effort to make a gift effective after her death failed. Hence, the stockbroker has no liability to the son. That was despite the fact that the son appeared to be a co-owner on the face of the certificates.
Another area where gifting is disputed is divorce court. Romantic gifts given prior to marriage, but not in contemplation of marriage, are not marital assets to be divided between the parties and remain separate property of the recipient. That rule holds true with respect to the engagement ring, as long as the recipient followed through on the intended wedding. If the wedding is called off by the recipient, the donor owns the ring. If the wedding is called off by the donor or by mutual agreement, the recipient keeps the ring.
Gifting during the marriage is more often the subject of argument during the divorce, as gifting can convert premarital assets from ownership of one spouse to ownership by both. In some cases, there is not even the requirement that legal title be transferred by the original owner to the other spouse. The 2017 case of Hooker v. Hooker is a good example.
In that case, Florida’s Supreme Court confirmed that under Florida law, an interspousal gift during marriage is a marital asset and is generally established by the same test applicable to any other gift. One of the assets in the case was a piece of land the husband owned prior to marriage, and by the time of divorce, was a working horse farm with a home. The property remained titled in the husband alone and was later transferred to a corporation. The wife signed the deed transferring the property to the corporation and the wife treated the property as her own, including maintaining a family home on the property. The court concluded the property was more than a horse farm, but was the family home involving horses as the personal and social life of the couple. The court concluded that the husband had made a gift of an interest in the property to the wife.
Incomplete gifts do not work, but sometimes a gift is created by the court even when the title is not transferred. That means when someone is pondering a substantial gift, he or she should discuss the plan with a qualified attorney. It might also be prudent to discuss tax consequences. Tax consequences are often overlooked.
There is a unified federal gift and estate tax. Gift and estate tax provide exclusions for gifts of up to $15,000 per year and a lifetime exemption of $11.58 million for each giver, indexed for inflation. If someone makes a gift of more than $15,000 in a year, a gift tax return is required. However, because the gift will likely also fall within the exemption, there is no tax. When someone dies, the total taxable gifts and gifts made at death determine if tax is due. Because the exemption is so high, most people do not have to worry about gift and estate tax.
The bigger problem is the tax situation of the recipient. The recipient of a gift is treated as if the recipient bought it for the lesser of the donor’s basis in the asset (what the donor paid adjusted by any depreciation or additions), or what the item was worth at the time it was gifted. The recipient will pay income tax when the asset is sold on the difference between what the recipient is treated as having paid for the asset and what it sells for.
If the recipient inherited the asset due to the death of the donor, the recipient is treated as having bought the asset for what it was worth at the time the donor died. It is usually a much better tax position for the recipient to inherit. Tax problems associated with gifting appreciated assets are often overlooked by a parent gifting assets.
Gifts from Santa Claus occupy a relatively unique position. There are no documented cases involving disputes over ownership to gifts from Santa Claus. Gifts under the Christmas tree should remain free from ownership disputes.
As for the “no take back rule,” that rule does apply to a completed gift.
William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.