Whether you're the "gifter" or the "giftee", it's no secret you want to make the most of a gift. But Federal Estate Tax Laws can make your ideal gifting process a little hard to navigate, to say the least. In recent years, the tax laws have increased the exemption amount (the amount someone can pass without paying any Federal Estate Tax) to approximately $11.2M per person, while the annual gift tax exclusion has increased to $15,000 per person.
While that's a change in your favor, I think it's important to talk through the implications of a gift versus an inheritance. An inheritance, which is a transfer that occurs upon death of the gifter, results in something called “stepped up basis.” A gift made during the gifter’s lifetime results in “carryover basis.”
Let's take a look at a real-world example to help make sense of these two ideas:Say you are gifted a piece of property from your parents (the gifters) prior to their death, and eventually, you decided you wanted to sell it. You would need to pay capital gains income tax on the amount of the sale price less your basis in the property. Unfortunately for you, your carryover basis could be very low if the property was in your family for some time. The carryover basis is the value of the property when it was purchased by your parents (or worse yet, when their parents purchased it – if their parents gifted it to them!). So, you could end up paying capital gains income tax on the majority of the sale price if you're not careful.
What should you do in this situation? The answer might be to gift it back. Here's why:
If you were to inherit the property upon the passing of your parents, you would stepped up basis -- a basis in the property equal to what the property is worth at the time of their passing. So, if you sold a property after they passed, you would have very little or no capital gain or other income tax to pay.
In a situation like the one presented above, you could be saving yourself (or a family member) thousands of dollars, which is why it's important to have a handle on your inheritance/gifting plans. And remember, this isn’t solely related to property. Gifts in question could include stocks, bonds, artwork, vehicles, antiques, and jewelry.
Want to talk about how Federal Estate Tax Laws might impact you? I'm happy to talk through the process. To start the discussion, feel free to give me a call at 765.423.7900, or email me at firstname.lastname@example.org.