Gift Property Or Leave It In Your Estate Plan? There Could Be Tax Consequences

Let’s say that you are leaving a good amount of property to your beneficiaries. You are concerned about the tax implications of leaving so much property to your family or heirs. So, you decide, why don’t you just gift the property to them now, and avoid those pesky estate taxes?

Problems in Gifting

The problem with gifting is that when you gift outside of your estate plan, whoever receives the property you are leaving, gets it at the same market value that you originally purchased the item for. That sounds like a good thing, because if you purchased the item a long time ago for cheap, your beneficiary is getting the property at that same diminished value, for tax purposes.

But it’s not a good thing, because if your beneficiary wants to sell the property, now or in the future, your beneficiary or heir now will have a significant capital gains tax—that is, the tax on the increase between the original purchase price, and the sale price. Specifically, the difference between the original basis (value) and the increased sale price, is the amount that is taxed with capital gains taxes.

Step Up in Basis

But if you were to leave that same property to your heir in your estate plan, there is a “step up” in basis, meaning that your heir gets the property at the same value as it currently is, for tax purposes. This is good for your heir, because if your heir wants to immediately sell the property, he or she can do that, and not have any real appreciable capital gains tax.

There is one catch to leaving property to someone in your estate: If the property is worth less than what the decedent originally paid at the time of death, the heirs will inherit at the lowered, depreciated value. This could again result in a capital gains penalty should the property ultimately be sold at more than what its value was, at the time it was inherited.

Estate and Gift Taxes

What about estate taxes? Yes, leaving property to your heirs in an estate plan, as opposed to gifting the property, will increase the value of your estate. But the threshold to even pay estate taxes is so high, unless you have a very significant estate, you or your beneficiaries won’t pay estate taxes anyway.

If you do opt to gift money or property, you will have to deal with the gift tax. However, you can gift property to beneficiaries, yearly, in smaller increments, without incurring a tax penalty. The amount changes from year to year, but currently, you can gift up to $17,000 to someone, without incurring a gift tax. The maximum you can gift overall without paying taxes on the gift changes, but lately it hovers at around $12 million.

Questions about how to maximize what you are leaving to your heirs, and how to minimize taxes? Call the Torrance will and estate attorneys at Samuel Ford Law today.

Sources:

taxpolicycenter.org/briefing-book/what-difference-between-carryover-basis-and-step-basis

wegnercpas.com/basis-considerations-property-transferred-by-gift-vs-inheritance/