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Financial Learning Center


Critical Decisions

Hold On or Give it Away?

So far, we've discussed transferring your property to your loved ones or to charity at your death. What if you do not want to wait until you die? There are pros and cons to giving assets away during your lifetime versus transferring those items at your death.

Holding on to assets until you die:

  • Gives you control over your assets
  • May reduce the risk that these assets will be attacked by the beneficiary's creditors
  • Assures that beneficiaries will not squander the assets you give them until they are mature
  • Allows you to change your mind about who will receive the property

Most importantly, your circumstances may change, and the assets you think you do not need today may be needed tomorrow. Will you need these assets for your retirement, for emergencies, for long-term care when you are older, or simply to afford the lifestyle you always wanted? Are you sure the people you give gifts to will be equally generous? Will those assets even be there if you need them back? For safety's sake, don't assume so.

If you're sure you will not need the assets to live comfortably and the person is able to control money or appreciate the meaning of a gift, you may want to consider making some gifts during your life. Consider the joy you will get from giving things of sentimental value to your loved ones. You can take the time to share the meaning of your gifts with the recipient and watch them enjoy your generosity. Remember, you can't take it with you.

Income Tax Differences between Gifting During Your Lifetime vs. Transferring Assets at Death

This discussion applies for an individual whose assets are less than the applicable exclusion amount.*

The way property is transferred will have some important implications to the person receiving the property. You need to understand some key concepts:

BASIS—the purchase price, including commissions and other expenses, used to offset sales proceeds in determining capital gain and capital losses for tax purposes.

GIFT—the basis of the property received as a gift is the same as the basis of the property of the person making the gift. This is the amount paid for the property plus any improvements made less any amount deducted on the donor's tax returns (e.g., depreciation in the case of business property), plus any gift tax paid on the net appreciation.

TRANSFER AT DEATH—the basis of the property transferred at death is the fair market value of the asset when the person dies (or six months later if the executor makes a special election). In the case of joint property transferred to a spouse, half of the basis is the surviving spouse's basis and the other half is the fair market value. In community property states, all of the community property transferred to a spouse will have a basis of fair market value. The impact of this rule on the capital gains income tax can be dramatic.

Example: Your grandfather owns some shares of stock that he paid $100,000 for 20 years ago and the shares are now worth $300,000. His estate is less than the applicable exclusion amount. He asks you if he should give it to you now or leave it to you in his will. You plan to immediately sell the property for its market value. Your marginal tax bracket is 25%.

Assuming this is his only asset, what should you tell him?

 

Gift

Inheritance
Your Sales Proceeds

$300,000

$300,000

Your Basis

$100,000

$300,000

Capital Gain

$200,000

$0

Income Tax (at 15% long-term capital gain rate)

$30,000

$0

In this example, you needlessly paid $30,000 of income taxes if you received the shares as a gift.

*If you assume there will be an estate tax at your death, an analysis must be done to see if gifting in this situation is advantageous.

IMPORTANT NOTE: Anytime you are involved with a large transfer of assets, make sure you consult with a financial professional.

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