The old saying goes “It is better to give with a warm hand,” meaning that it is better to give your property away while you are still there to enjoy the process of giving your property. There is something to be said about the joy that you experience in seeing your children receive your gifts, but is this good advice? Is it best to give your property away while you are living? There are a few things to consider before jumping in and giving all your property away.
Uncle Sam doesn’t care whether you gift your property to your kids while you are living or after you have passed when it comes to estate and gift tax. As of 2018, there is an $11 million-dollar exemption, meaning that you can pass $11 million dollars on to your children without any death tax consequences. This exemption, though, can be used for either gifts or the property you own at death, so that is of no consequence. If death tax is a concern for you then gifting while you are living over a period of time can actually reduce the property that will be subject to the death tax, if you use a proper gifting plan that takes advantage of categorical gift exemptions and the annual exemption (which is now at $15,000).
Capital gains taxes are a different story from estate and gift taxes. When you gift property to a loved one while you are living you give a “carry-over basis” to that loved one. Meaning your kid who is receiving the property will have the same tax basis. Let’s pretend that you want to gift a rental property to one of your children so they can have the experience of managing property. Let’s also imagine that you bought the property 20 years ago at $200,000. Today it is worth $500,000. If you gift the property to your child while you are alive, the child will have a $200,000 tax basis and if they sell the property for $500,000 after they received it, they will have to pay capital gains tax of $300,000. Let’s pretend on the other hand that you kept the house in your name. When you passed, your plan indicated that the rental property would go to your son. They turn around and sell the house the next day for $500,000. They would not have to pay a red cent in capital gains tax because when you pass property at death you get a “step-up” in the basis to the date of death value. The property’s tax basis would have been adjusted to $500,000 and there would be no gains (in the eyes of the IRS) on which to charge capital gains tax.
One gifting strategy is to give property to your child that will likely appreciate. If your gifted stock in a company that is likely to increase in value quickly, they can increase in your child’s hand rather than your own and it would have less effect for gifting tax purposes.
Do not feel like you must have an identical gifting plan for all your children. Giving some so that one child can start his or her business and not gifting to another child that is deep into their career is sometimes the best option.
Even if it is a smart move for tax reasons, you should never do anything to possibly jeopardize your own future. Tapping into your retirement to fund a child’s dream is rarely the right option.
Giving your child their inheritance early may or may not be the right thing to do. No two situations are identical. If you are thinking of giving large amounts to your children, consult a professional who can give you guidance and present you with options that you may not have known existed. Thanks for watching.