New Considerations for Gift Planning

Recent law changes should cause many folks to rethink which is more important:  estate/gift planning versus income tax planning.  Fewer estates will now be subject to the death tax, and even if it does apply, the top rate of 40% is more favorable than in the past.

Gifting has long been a staple of estate planning — get rid of value during life time, and save the death tax on not only the value as of the gift date, but also the appreciation in value from gift date to death date.  And annual exclusion gifts have been particularly favored for a variety of reasons.

But consider that gifts of appreciated property carry a potential income tax cost to the beneficiary, because the donor’s income tax basis becomes the donee’s basis.  No different than before.  Sale by the donee triggers an income tax liability to him or her right away.  Also, an appreciated asset held by the donor until death allows a stepped up basis to the heir, thus wiping out income tax on pre-death appreciation altogether.

Push a pencil before deciding whether estate tax savings may outweigh income tax cost in each situation.