Introduction:
Most people make gifts relatively often, without considering the legalities of the transaction. Holidays, birthdays, or just to make life better for children and relatives, gifts are a favorite way to show love and appreciation.
Unlike an exchange transaction in which the parties exchange items of value, such as paying money for an automobile, a gift is a one-way transaction in which one party transfers value to another without return value being delivered. It is volitional on the part of one party and by its very definition, it is voluntary. While a typical transaction can be enforced in court if one party fails to perform, a gift is normally not an enforceable obligation on the part of the party receiving the gift.
Assume that a giftor changes her or his mind after a gift is made. Since it was voluntarily given, can it be retrieved if the giftor wishes? What is required to allow a giftor to retrieve a gift?
That is the topic of this article.
The Basic Law:
While it may seem obvious, many making a gift seem to feel that they retain a right in the property gifted even after the gift is made. But once a gift is given, it generally becomes the legal property of the recipient, making it difficult for the donor to reclaim it without the recipient’s consent. The donor no longer owns the property; it is fully vested in the recipient.
However, to make a gift truly irrevocable, the law requires that the gift transaction include the following criteria:
Actual intent to make a gift. One cannot make a gift by accident or negligence. The donor must develop an actual intention to transfer the property to the donee.
Delivery of the gift. Mere words or intention is not sufficient to make an irrevocable gift. Title must transfer. This usually means physical possession of the asset or transfer to the name of the donee if the asset is stocks, bonds, real property, or a registered vehicle.
Acceptance of the gift. The donee must decide to take the gift and so notify the donor. Until that actual acceptance occurs, the donor may retrieve the gift. Gifts made secretly are thus revocable…but note that if the donor has altered title to another person’s name, there may be difficulty in getting the title altered back without the donee’ s consent.
Donative intent. The donor must intend to transfer title, not do so by error. And the donor must not expect payment in any way in return for the gift.
Absence of consideration. A transaction based on exchange of value is not a gift transaction. If I purchase a dress the dress maker expects to be paid. That is an entirely different transaction to the dress maker giving me a dress and expecting no payment.
Competence and capacity of both parties. Both the donor and the donee must have the ability to understand what they are doing and the legal capacity to do so. A gift from a ten year old cannot be made irrevocable…. nor can that ten year old agree to accept it.
If any of the above criteria are not met, the gift may be found by a court to be revocable by the donor. The burden of proof to show that the gift is revocable would normally rest on the donor.
Note that the above criteria grants to the donee the ability to refuse a gift…both parties must assent to the gift for it to be irrevocable. While you can always make a gift, if the donee does not want it…you cannot make it irrevocable.
Complications:
A gift may be revocable if certain events occur.
If fraud was involved in obtaining the gift. (Example: I lied to you about being your son, so you give me money.)
Undue influence. As with making a will or trust, if the court finds that the donee exerted such control over the donor as to eliminate his or her ability to form a valid intention of giving, the court can nullify the gift.
Lack of Mental Competency. The donor and the donee must have the requisite state of mind to know what they are doing. Someone suffering from severe mental disease can neither give nor receive an irrevocable gift.
Breach of a Confidential Relationship Fiduciary Duty. If the gift is obtained from someone who is owed a fiduciary duty, then it may be argued that accepting a gift was a violation of that duty and may be voidable. (Example: I am a director of a company and the company gifts me shares of stock, that gift may be voidable.)
Public Policy Restrictions or Illegal Activity. If the donor is nearly bankrupt and she gives away her remaining assets, thus being forced onto welfare, such a gift may be voidable. If the gift is illegal, such as giving a weapon to a ten-year-old, that gift may be voidable.
Real Property Requirements:
There are additional requirements if the gift involves real property. The Statute of Frauds applies to gifts of real property, meaning that any real property gifted to you will requires a writing. The donor (grantor) must provide a valid writing that indicates the grantor’s and grantee’s names, describes the property sufficiently, indicates that it is a grant of the grantor’s interest in the property, and signed by the grantor. The writing (oftentimes a deed) must also be delivered to and accepted by the grantee.
Gift Causa Mortis:
One type of gift is given special requirements under the law and are termed “gift causa mortis,” also known as “gifts in view of impending death.” These are gifts made under the false assumption that one is dying and those gifts may be revoked under a number of circumstances. Note the cause of death feared may be either disease or danger. California law provides that this type of gift may be revoked by the giver at any time; it may also be revoked automatically if the giver recovers from illness or escapes from the peril under which the gift was made, among other situations.
Thus, if I am going to war and feel my assignment is essentially a suicide mission thus give you my truck, but survive, I can retrieve that gift at any time.
Gift Tax and Capital Gains Tax Considerations:
There is a Federal Gift tax due on any sizable gifts and a duty on the donor to report the gift to the government and pay applicable taxes. While the donor can elect to utilize the lifetime exemption available for estate taxes, keep in mind it will reduce the available exemption for the estate.
Further, appreciated assets gifted lose the stepped-up basis available to property inherited due to death. Thus, if you give me your home which has appreciated by one million dollars since you bought it, I take as my basis for computing capital gains the cost of the home to you. Assuming you purchased it for one hundred thousand dollars, then you face a nine hundred-thousand-dollar capital gain if you then sell it. If you inherit, however, you would get a stepped-up basis of value as of date of death…and save the payment of the taxes due if you sold it then.
Our office often sees dying people gifting appreciated property away thinking they are saving estate taxes. Not only will they face gift taxes, but they lose the benefit of the stepped-up basis. The tax cost can exceed any estate tax savings. Such gifts should only be considered after consultation with your certified public accountant.
Conclusion:
Before any gift is made, careful consideration must be given to the issues discussed in this article. Taxes can be incurred; relationships can alter over time and different needs arise that were not foreseen when the gift was made.
One client gifted a son proceeds from the sale of her house since he needed capital to start a business but a year later her other son was in a terrible auto accident, losing use of his legs. The injured son clearly needed monetary help not only immediately but for many years while he recovered, but when our client asked the first son to return a part of the gift he refused. He needed it for his new company. She was dismayed when she discovered that she had no legal redress to reclaim the gift and, indeed, owed gift taxes on it. Perhaps more sadly, the dispute destroyed family relationships.
Life is uncertain, but gifts completed are permanent and can only be retrieved with the consent of the donee…and note that if the gift was completed and the donee then returns it…there can be two gift taxes due, one for the initial gift and one for giving it back!
The lesson is clear: think long and hard before making a gift and understand that the law will enforce the title vested in the donee.