When faced with the question of gifting your assets, there are multiple variables to consider. Keeping an asset causes it to be included in the estate of the deceased for estate tax purposes, whereas gifting an asset allows its future appreciation to grow outside of the estate with its intended beneficiary, possibly saving large amounts of estate tax. But, keeping assets within an estate does not come without benefits, as all assets receive a step up in basis to Fair Market Value at death.
Most of the uncertainty in this area comes from our ever-changing tax laws. Though the Tax Cuts & Jobs Acts doubled the estate tax exemption to over $11 million in 2018, under current law this exemption is set to return to $5.6 million in 2026. Congress could extend the TCJA exemption provisions, or we could get a new President or Senate that adjusts the limits or tax rates. All we truly know for certain is that we don’t know what will happen to the estate tax laws.
Things to consider when deciding if gifting assets is appropriate include:
- Asset value over estate tax exemptions – gifting becomes more appealing the more an asset value exceeds the exemption, especially when the exemption is high
- The amount of time a beneficiary intends to hold an asset
- State estate tax rates – in 2019, 13 states impose an estate tax
- The basis-to-market ratio – the lower an assets basis is compared to its fair market value, the more potential to take advantage of the basis step up
- Taking advantage of annual exclusions – $15,000 in 2019, and this is per beneficiary, not per donor