Mon-Thur, 9am-5pm; Fri, 9am-1pm

(865) 691-0898

“Spend each day trying to be a little wiser than you were when you woke up.”

— Charlie Munger, Vice Chairman of Berkshire Hathaway

When should you begin to distribute your wealth?  Most people think of this as something that happens once they have passed away.  But giving today allows your loved ones to benefit from your gifts right away and gives you the enjoyment of seeing your gifts improve their lives.  In addition, those gifts can grow in value in their hands, rather than yours, which helps reduce your taxable estate.  Fortunately, a large portion of your gifts or estate is excluded from taxation, and there are numerous ways to give assets tax free, such as:

  • Using the annual gift tax exclusion
  • Using the lifetime gift and estate tax exemption

Annual Gift Tax Exclusion

Currently, you can give any number of people up to $17,000 each in a single year without them incurring a taxable gift ($34,000 for spouses “splitting” gifts).  The recipient typically owes no taxes and doesn’t have to report the gift on a tax return.  However, if your gift exceeds $17,000 to any person during the year, you must report it on a gift tax return, IRS Form 709.  Spouses splitting gifts must always file Form 709, even when the gift amount is under the exclusion and no taxable gift is incurred. 

Lifetime Gift & Estate Tax Exemption

The gift and estate tax exemption has increased significantly since the passage of the Tax Cuts and Jobs Act (TCJA).  Currently, the annual lifetime exclusion amount is $12.92 million (or $25.84 million for married couples).  The $12.92 million exemption applies to gifts and estate taxes combined – any portion of the exemption you use for gifting during your lifetime will reduce the amount you can use to lower your estate tax.  One big caveat to be aware of is that the $12.92 million exemption is temporary and only applies to tax years up to 2025.  Unless Congress makes these changes permanent, after 2025 the exemption will revert back to the $5.49 million exemption (adjusted for inflation).  Keep in mind, the highest tax rate for gifts or estates over the exemption amount is 40%!

How to Minimize Taxes for Recipients

One thing to remember about the assets you gift during your lifetime is that your cost basis will transfer over to the recipient.  So, if the asset has significantly appreciated in value prior to the gift, the recipient could incur a substantial taxable gain when selling that asset. 

Example 1: John bought Apple stock for $4,000 and it is now worth $10,000.  If he gifts the stock to his daughter, Mary, the basis will “carry over” from John to Mary.  The result is that Mary will own Apple stock worth $10,000 with a cost basis of $4,000.  If she sells the stock, she will realize a capital gain of $6,000. 

But in general, highly appreciated assets that are inherited as part of an estate get a “step up” in basis (resetting the cost basis to the current market value), which means a taxable gain could be avoided if the asset is sold soon after being received. 

Example 2: John bought Apple stock for $4,000 and it is now worth $10,000.  If he passes away and Mary inherits the stock, she will get a “step-up” in tax basis to the value on John’s date of death.  The result is that Mary will own Apple stock worth $10,000 with a cost basis of $10,000.  If she immediately sells the stock, she will not pay any capital gains tax.  If she later sells the stock for $12,000, she will only pay capital gains tax on the $2,000 gain (the difference between the sale price and her stepped-up basis).   

This means you need to carefully select which assets you gift, in order to minimize the impact of taxes on your loved ones.  In general, cash and assets with little appreciation are best for gifts, while highly appreciated assets are better to transfer as part of your estate.