Skip to Content

Inheritance vs. Gifting: What is the Best Way to Share Your Wealth Given the Current Tax Climate?

Written By G. Thomas Watson, CFA, CFP® November 12, 2021

From their first steps to their first apartment, you’ve been there to support your children through life’s many ups and downs. Naturally, you have and always will want what is best for them. Sharing your wealth with them once you are gone, then, will be no different.

Traditionally, parents plan to share their wealth by leaving their children an inheritance. That is, assets are bequeathed and shared after the parents’ passing. But, should an inheritance strictly be just that? What if you could enjoy seeing your children receive and utilize parts of their inheritance while you are still alive?

A Different Way of Thinking

What if you could give assets you believe you won’t need in your lifetime to help your children financially while you are still alive? Perhaps you could help your child with a home renovation they have been putting off or pay a little extra cash for the band they want at their wedding. Or, maybe you take a family vacation with a higher price tag to enjoy the experience all together.

While spreading shared wealth out between lifetime gifts and the traditional inheritance is not a new strategy, it may be a more beneficial one to consider given the current tax climate.

Gifting & Tax Considerations

Whether you are a high-income earner who is familiar with financially savvy tax-planning gifting strategies, have substantial assets saved, or just looking where to begin, there are a few considerations you should know.

Gifts up to $15,000 per recipient per year qualify for a full tax exemption.  This is relatively straightforward if you are gifting cash up to the $15,000 allowance.

For gifts over $15,000 or more per individual per year, you will be required as the giver to file a gift tax return Form 709. Only the amount above the $15,000 limit will need to be reported. For example, if you gift your son $35,000, only $20,000 will need to be reported on Form 709. The receiver is not required to pay taxes on either amount unless you are unable to pay taxes on the gift before death. However, any amount gifted above the $15,000 will decrease the lifetime exclusion.

But, what about appreciated assets?

This is where things get a bit tricky, but also make a pretty sound argument for gifting given the current tax changes that could be coming down the pipeline in the near future.

The (Potential) Elimination of the Step-Up in Basis on Inherited Assets

While an individual may not pay income tax on an appreciated asset upon receipt of a gift, they will be responsible for covering the capital gains tax assessed upon sale. How much capital gains tax the recipient will incur will depend on the asset’s cost basis. If you gift your son an asset you purchased at $20,000 that is now valued at $50,000, he will be responsible for paying capital gains on $30,000.

But, if you bequeath that same asset to your son upon your death, the basis is “stepped up” to the fair market value of the asset on the day of your death. So, rather than owing capital gains on $30,000, your son will only owe capital gains on the amount the asset appreciates between the time of your death and the time he sells the asset.

In the past, then, it was often most prudent to wait and gift highly appreciated assets to heirs once the parents had passed in order to take advantage of the step-up in basis. But, all of that could change.

Under Biden’s proposed tax changes in the American Families Plan (AFP), the step-up in basis could be altered dramatically. Going further, the plan calls for an end to the effects of a stepped-up basis for gains of $1 million or more ($2 million or more for a married couple). If passed, many wealthy Americans will no longer be able to pass stocks, real estate, or other capital assets to their heirs without paying capital gains tax.

In the past, we may have asked our clients: “Does your heir need the gift now, or can it wait? Could you gift cash or other property that would not trigger capital gains tax instead?”

But now, we are asking, “Would it benefit you and your family to receive some of their inheritance in the form of gifts now?”

Not only could this alleviate some of the tax burdens that your heir would incur, but would allow you to enjoy seeing your financial help being put to good use.

How Much to Gift and When

If parents give while they’re alive, how much should they give and when? This may not be as straightforward as it may seem. As you know, one move in your comprehensive financial plan triggers subsequent movement in other places. When you liquidate an investment, you may incur a tax event, for example.

The most important decision to make will be deciding exactly how much you can afford to give without stretching yourself too thin in your own lifetime. Your own goals, financial needs, and tax considerations should always be examined first.

Your financial plan will be the key driver in determining how to best approach this strategy. Think of it like using Google or Apple Maps on your phone when you’re traveling. When you miss a turn or deliberately want to take the scenic route to your destination, your map will “re-route” you so you can still arrive at the same place—albeit from a different direction. Your financial advisor can work with you to “re-route” how you will share your financial gifts now and after your passing.

While gifting during your lifetime can be extremely rewarding, you’ll also want to be sure to set clear boundaries and expectations with your gift recipients ahead of time. Emphasize that your generosity is a gift. While there are typically no strings attached with gifts, the child should not come to rely on these gifts constantly. You want to avoid becoming your child’s personal ATM.

Whether you need comprehensive financial planning or tax planning, or just retirement planning services, the financial advisors at Williams Asset Management have your best interests at heart. We can help craft an all-encompassing plan that helps you pursue your financial goals and better equips you to have a smooth transition into retirement. Call 410-740-0220 today or contact us online to schedule an appointment with our financial professionals.