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January 25, 2023

Lifetime Gifts vs. Bequests at Death: Which Option is Right For You?

One of the primary goals of estate planning is to pass along as much of your wealth and assets as possible to your family, which involves protecting your estate from gift and estate taxes. One way to do this is by giving gifts during your lifetime. 

Considering the inflation-adjusted $12.92 million gift and estate tax exemption, lifetime gifts are an appealing option for many. But they’re not the right choice for everyone. Depending on your unique situation, you may find that there are tax advantages to keeping assets in your estate during your lifetime and making bequests at death. 

Gifts vs. bequests: understanding the tax implications

Lifetime gifts 

When you make lifetime gifts and remove assets from your estate, you are protecting future appreciation from estate tax. However, the recipient will receive a “carryover” tax basis, meaning they assume your basis in the asset. 

If a gifted asset has a low basis compared to its fair market value (FMV), a sale will trigger capital gains taxes based on the difference. 

Bequests at death

When you transfer assets at death, the recipient can sell them with little or no capital gains tax liability. Those assets currently receive a “stepped-up basis” equal to their date-of-death FMV. 

Which strategy has the lower tax cost? 

Which is the better option—transferring an asset by gift now or by bequest later? That depends on a few factors, including: 

  • The asset’s basis-to-FMV ratio
  • The likelihood that its value will continue to appreciate
  • Your exposure to gift and estate taxes, now or in the future 
  • How long you expect the recipient to hold the asset after receiving it 

Navigating uncertainty with future estate tax law

It can be difficult to choose the right time to transfer wealth, especially because there are many unknowns as to what will happen to the gift and estate tax regime down the road—for example, without further legislation from Congress, the base gift and estate tax exemption will return to inflation-adjusted $5 million in 2026. 

The good news is that with carefully designed trusts, you can reduce the impact of this uncertainty. 

If the tax exemption decreases

If you believe the gift and estate tax exemption will be reduced, you can take advantage of the current exemption by transferring appreciated assets to an irrevocable trust. This will help you avoid gift tax and protect future appreciation from estate tax. 

As a result, your beneficiaries will receive a carryover basis in the assets. If and when they sell them, they will be subject to capital gains taxes. 

If the tax exemption stays the same or increases

If the gift and estate tax exemption stay the same or increases, a trust gives the trustee certain powers that, when exercised, will include the assets in your estate. 

Your beneficiaries will then receive a stepped-up basis, with the higher exemption shielding all or most of the assets’ appreciation from estate taxes. 

Find the right strategy with Smolin

If you haven’t yet decided between lifetime gifts or bequests at death, it’s helpful to work with a professional to monitor legislative developments so you can update your estate plan accordingly. 

At Smolin, our CPAs can work with you to find the right strategy for your situation. Contact us to get started today. 

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