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Should gifts be made to heirs in advance of an inheritance?

| Jan 1, 2016 | Uncategorized

Many Philadelphia families are aware that they are able to pass down $5.43 million in wealth without incurring federal estate tax. Beyond that amount, additional wealth is subject to taxation. As many wealthy people age, they begin to consider if gifting is a wise strategy to pass on wealth to heirs while avoiding estate taxes. Not all gifts are equal, however, and it is important to understand how the current rules apply.

For example, many people wish to give a family member a piece of real estate as a gift in order to remove that property from their taxable estate. However, when that piece of real estate is sold, any increase in value that took place between the original purchase price (the “cost basis”) of the gift and the sale is subject to capital gains tax. Any improvements made to the property will increase the cost basis, which narrows the gap and leads to lower capital gains tax.

When an owner passes away, the cost basis of any of his or her assets is “stepped up” to the current market value. This further shrinks the taxable portion of the eventual sales price. One creative way to reduce estate taxes is to gift a piece of property to an older loved one. When that individual dies, the basis will be “stepped up” and the party that inherits the property will do so with the increased basis.

In this way, a piece of property can be kept within a Philadelphia family, while also meeting several other goals. The original owner can gift the property to an older relative, thereby reducing his or her own taxable estate. When the property is passed down after that relative’s death, the heir or heirs will inherit the asset with a higher basis. If and when the property is sold, that will reduce the amount of capital gains taxes.  

Source: marketwatch.com, “5 ways to protect your estate from capital gains taxes“, John O. McManus, Dec. 25, 2015

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