The Federal Government assesses a tax on assets that are gratuitously transferred to another person. Assets transferred during the donor’s lifetime are subject to gift tax. Assets transferred after death are subject to estate tax. The gift tax rate and the estate tax rate are both 40%. The Federal Government provides U.S. citizens and residents a credit to apply towards the payment of estate and gift taxes. This credit, often referred to as the Unified Credit, allows individuals to transfer $1l-,400,000 (2019 value) in assets during lifetime (gift) or at death (estate) with no tax liability. This consistency between the estate and gift tax regimes often leads clients to ask, “does it matter when I transfer my assets to my children?” The answer is “Yes.” The timing of a gratuitous transfer has significant income tax consequences.
In general, assets acquired by gift have a “carryover” income tax basis for the person that receives the property. For example, Dad gifts Son 100 shares of Company stock. Dad purchased the stock for $5,000 in 1990. The fair market value of the stock on the day of the gift is $700,000. Son will receive the stock with an income tax basis of $5,000. The income tax basis is “carried over” from Dad. If Son sells the stock immediately after receiving the gift, Son will recognize a $695,000 gain, subject to capital gains tax.
In the alternative, a beneficiary acquiring assets from a decedent will receive the property with an income tax basis equal to the fair market value of the asset on the date of the decedent’s death. For example, Son receives 100 shares of Company stock as a beneficiary of Dad’s trust. Dad purchased the stock in 1990 for $5,000. On Dad’s date of death, the fair market value of the stock was $800,000. Son will receive the stock with the income tax basis of $800,000. If Son sells the stock for $800,000 immediately after receiving the stock, Son will not recognize any gain.
Most clients and their children will receive the greatest tax benefit by transferring assets at death. There are exceptions to this rule. For example, clients with assets greater than the Unified Credit amount should consider lifetime gifting to take advantage of the annual gift exclusion. Clients should also consider lifetime gifting if they own highly appreciable assets. These exceptions, as well as other concerns (tax and not tax related) should be discussed with your estate planning attorney before making decisions about the transfer of your assets.
Hartog, Baer, Zabronsky, APC is pleased to announce the recipients of the 2024 HBZ Diversity Scholarship. Congratulations to Saleshia Ellis, Alejandra Hernandez, and Jiayu Fang for their outstanding achievements!
Many trustees employ counsel to provide advice on dealing with and responding to inquiries from beneficiaries. Trustees may believe that their communications with and advice from counsel are confidential and cannot be disclosed to the beneficiaries without their consent. The recent court decision in Fiduciary Trust International of California v. Klein (2017) 9 Cal. App. 5th 1184 is a cautionary tale that warns trustees against assuming that all communications with an attorney are confidential.
Principal Ryan Szczepanik discusses the value of dedicated trusts and estates firms in a new article on The Recorder.