There are many scenarios in which it may make sense to give away assets (stocks, bonds, mutual funds, etc.). Perhaps you are considering gifting stocks to younger relatives to help them learn about managing investments. Or, you may be primarily motivated by the income and/or estate tax benefits of gifting a part of your portfolio.
Whatever the reason (and whoever the recipient is), gifting assets can have some significant planning implications for your income tax, gift tax, and estate plans. How and when you make the gift will ultimately determine the impact on your overall planning, which is why it’s important to strategize with your estate planning advisors in advance of the actual gifting.
Transferring assets to a family member, friend or other individual is logistically pretty simple. Gifting stocks or other assets should be possible online through your brokerage account or with the help of your broker. If the recipient is a minor, assets can be gifted to a custodial brokerage account managed by an adult. (The minor can participate in making investment decisions with their new assets, but the account’s custodian (typically a parent) has to sign off on everything.)
Tax implications:
Gifting assets could trigger gift taxes if the fair market value of the gift exceeds the annual gift tax exclusion amount ($17,000 per individual for 2023, indexed for inflation). As the donor, you’re responsible for paying any gift taxes assessed on values beyond this annual limit. Importantly, your cost basis in the gifted assets “carries over” to the gift recipient. As an example, let’s say you bought $4,000 in assets that are now worth $10,000. You gift them to your daughter, who keeps them for several years and then sells them when they are worth $12,000. She’ll owe capital gains taxes on the entire $8,000 gain since your original purchase, since your cost basis carried over to her.
What this strategy means for your estate plans:
Giving away assets reduces the value of your estate, which is why it can be part of a good estate planning strategy for individuals who can afford to part with those assets. Lowering the value of your estate will lower its estate tax burden relative to the gifted assets (you’re giving away the asset itself, but also any future appreciation). However, it’s important to be strategic about gifting assets that are valued above the annual gift tax exclusion amount. Any taxable gifts you make during your life count toward your lifetime gift and estate tax exemption. Making generous gifts of valuable assets now could trigger estate taxes later on, so it’s important to consider estate tax planning before embarking on a gifting strategy.
At the other end of the wealth spectrum, gifting assets may also help you qualify for need-based long-term care coverage through Medicaid/MassHealth. Again, connect with a financial advisor prior to making gifts for this purpose as there are numerous landmines to avoid.
Donating assets can be a very tax-efficient way to support your favorite charitable organization(s), for those that have a favorite. But Individuals who don’t currently have a favorite, or want to spread smaller donation amounts to a larger group of charitable recipients can use a donor-advised fund (DAF) for gifting stocks or other assets. This strategy allows the donor to enjoy the income tax benefits in the year of the gift, but can spread out the smaller gifts to the “end charities” over time. Using the DAF strategy can also help to mitigate income taxes in an unusually high income tax year (like the year of a business sale, for example). Using a DAF in this scenario allows you to “prefund” X years of charitable giving into the current tax year, to maximize the income tax benefits.
Tax implications:
Donors may enjoy multiple tax benefits from gifting assets to charity, such as receiving a tax deduction equal to the fair market value of donated assets (up to 30% of your AGI when you gift appreciated securities that you’ve owned for at least one year). Charitable gifts are exempt from the gift tax, so you can make significant donations without taking a gift tax hit. Similar to gifts to individuals, the charity’s cost basis in the gifted assets are carried over from you, the donor. However, charities by definition are not tax paying entities. As a result, you are permanently removing any capital gain exposure from the gifted asset by giving them to charity.
What this strategy means for your estate plans:
As with gifting stocks or other assets to individuals, gifting assets to charity can be a useful strategy for reducing your estate's value and therefore reducing your eventual estate tax burden. Keep in mind that you are also gifting the future appreciation (or depreciation) of the asset.
Using your estate plans to distribute assets to individuals or charities upon your death can be accomplished in multiple ways. A beneficiary can be named on certain brokerage accounts, so they inherit all of the assets within that account upon your demise. You could also use your Will to make bequests of specific assets to one or more named individuals. You could gift assets in a trust and name someone as the beneficiary upon your death. Different strategies have their own benefits and drawbacks, so these are certainly decisions to discuss with your advisors.
Tax implications:
One tax benefit of distributing assets at death is that the new owner typically receives a step-up in basis. This essentially means the new cost basis in those assets are equal to the value reported on your estate tax return. Back to our earlier example, if you paid $4,000 for assets and they’re worth $10,000 when your daughter inherits them, then she later sells them for $12,000, she would only owe capital gains taxes on $2,000 (the appreciation from the date inherited to date sold).
What this strategy means for your estate plans:
How you structure the transfer of assets will determine the effects of this gift on your overall planning. If you are still in control of the assets when you die, the value of those assets will be included in the value of your estate. If you’ve used estate planning to move them to a trust outside of your control, they should be excluded from your taxable estate. As always, there are many factors to consider when you and your advisors are crafting your gifting strategies.
What Would Gifting Stocks or Other Assets Mean For Your Specific Income/Estate Plan?
Sachetta’s estate planning and tax advisors can help you cut through the hypotheticals to create a plan that makes the most sense for you and your family. If you’re considering gifts to a loved one or to charity, let’s talk through the short-term and long-term implications on your overall planning. Contact us today.
As Senior Wealth Manager, Jeffrey R. Aron, CFP®, MSFP manages all aspects of Financial Planning and client services, including the preparation of comprehensive financial plans (retirement, education, cash flow, etc.), insurance and asset allocation recommendations, advanced estate planning strategies and of course, plan implementation.