Now or later: When is the right time to transfer your wealth?

February 11, 2021

To gift or not to gift? It’s a deceptively complex question. The temporary doubling of the federal gift and estate tax exemption — to an inflation-adjusted $11.7 million in 2021 — is viewed by some people as a “use it or lose it” proposition. In other words, you should make gifts now to take advantage of the exemption before it sunsets at the end of 2025 (or sooner if lawmakers decide to reduce it earlier).

But giving away wealth now isn’t right for everyone. Depending on your circumstances, there may be tax advantages to keeping assets in your estate. Here are some of the factors to consider.

Lifetime gifts vs. bequests at death

The primary advantage of making lifetime gifts is that, by transferring assets from your estate, you remove future appreciation from estate taxes. But there’s a tradeoff: The recipient receives a “carryover” income tax basis — that is, he or she receives your basis in the asset. If a gifted asset has a low basis relative to its fair market value (FMV), then a sale will trigger capital gains taxes on the difference.

An asset transferred at death, however, currently receives a “stepped-up basis” equal to its date-of-death FMV. That means the recipient can sell it with little or no capital gains tax liability. So, the question becomes, which strategy has the lower tax cost: transferring an asset by gift (now) or by bequest (later)?

The answer depends on several factors, including the asset’s basis-to-FMV ratio, the likelihood that its value will continue appreciating, your exposure to gift and estate taxes, and how long you expect the recipient to hold the asset after receiving it.

Also, be aware that President Biden discussed eliminating the step-up in basis at death during his campaign.

Hedging your bets

Determining the right time to transfer wealth can be difficult, because so much depends on what happens to the gift and estate tax regime in the future. It may be possible to reduce the impact of this uncertainty with carefully designed trusts.

Work with us to monitor changes in tax laws and adjust your estate plan accordingly: Russ Russell, Debby Spain, Caty Richardson, and Sarah Johnston.