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March 2, 2021

When Should You Transfer Wealth to Your Inheritors?


wealth inheritors

Should you gift now? Or not? The answer isn’t simple. The doubling of the federal gift and estate tax exemption to an inflation-adjusted $11.7 million in 2021 is sometimes considered to mean that you use it or lose it. This means that you should gift now to take advantage of this exemption, which ends in 2025 (or even sooner, depending on legislation).

So what should you do? It depends. For some people, there may be advantages to keeping assets in your estate. Here’s what you need to consider.

Giving now or at death?

The main advantage of making lifetime gifts is that if you remove assets from your estate now, future appreciation isn’t subject to the estate tax. The tradeoff is that the recipient receives a “carryover” tax basis. He or she assumes your basis in the asset. If the gifted asset has a low basis relative to its fair market value (FMV), a sale will trigger capital gains taxes on the difference.

If an asset is transferred at death, it currently receives a “stepped-up basis” equal to its date-of-death FMV, and the recipient can sell it with little or no capital gains tax liability. The strategy that you choose will depend on which approach has the lower tax cost: transferring an asset by gift (now) or by bequest (later)?

This depends on factors including the asset’s basis-to-FMV ratio, the likelihood that its value will continue appreciating, your current or potential future exposure to gift and how long you expect the recipient to hold the asset after receiving it.

Here’s another thing to keep in mind: President Biden proposed eliminating the stepped-up basis benefit during his campaign.

Educated guesses

It can be hard to know exactly when you should transfer wealth. But, carefully designed trusts can help reduce the impact of this uncertainty.

For example, if you believe that the gift and estate tax exemption will be reduced dramatically in the near future, you might transfer appreciated assets to an irrevocable trust in order to take advantage of the current rates and shield future appreciation from estate tax. Your beneficiaries will receive a carryover basis in the assets, and will have to pay capital gains taxes when they sell them.

But what if when you die the exemption amount hasn’t dropped, but instead has stayed the same or increased? To prevent this possibility, the trust can give the trustee the ability to cause the assets to be included in your estate. In this case, your beneficiaries can enjoy a stepped-up basis and the higher exemption can also shield all or most of the asset’s appreciation from estate taxes.

If you have questions about setting up this type of trust, or for advice about navigating gifting decisions, contact a Smolin advisor today.

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