The manner in which assets are transferred, either as a lifetime gift or by way of inheritance will affect its income taxable status and basis calculation.

Selling an asset for profit generally exposes the gain realized to income taxation.  In general, the gain is considered to be the increased difference, if any between the original value or cost (with certain adjustments) and the sales price (with certain adjustments).  The adjusted original cost is known as the “cost basis”.

If one gifts an asset to another during their life, the cost basis of the asset in the hands of the recipient is the same as it is in the hands of the donor of the gift. This is referred to as a “carry-over” basis. Upon a sale of the asset by the donee, any income tax exposure from the gain realized upon a sale by the done is the responsibility of the recipient.

On the other hand, under current law the cost basis of an inherited asset is the fair market value of the asset on the date of the decedent’s death.   This is known as the cost basis “step-up” and the recipient enjoys the corresponding income tax advantage.

Therefore, if an asset is sold prior to death, any increase in its value is for the most part taxable income to the seller. On the other hand, if one inherits an asset, the cost basis in the hands of the recipient is the fair market value of the asset, i.e., the stepped-up basis. If the recipient sells the asset assuming no further appreciation takes place after the death of the decedent, then no gain is applicable.

Based on the above analysis, it appears that there is a distinct income tax advantage, generally speaking, to transferring assets at one’s death rather than gifting during one’s life.  However, there are additional important factors that may have meaning otherwise.

First, if one considers that in 2024 the estate tax marginal rate for assets presently valued at over $13,610,000 is 40% and the long-term capital rate may be 20%, then removing assets from one’s estate taxable estate by making lifetime gifts has a clear advantage over income tax savings and should not be overlooked. Additionally, appreciation that takes place after a lifetime gift is made, but before the donor’s death, bypasses the estate taxable estate of the donor.  This concept is referred to as an “estate freeze”.  Estate freeze techniques are equally favorable to lifetime gifts of marketable securities, business interests, and more.

The above discussion is a basic analysis with respect to lifetime gifting versus gifting at death. The purpose of which is to demonstrate in general terms the value of a tax advantageous planning technique.  It is by no means a complete examination of the subject matter. There is a myriad of complex nuances that come into play when designing any estate or gift plan. Therefore, consideration of all of the facts, circumstances, and applicable laws is vital before taking any action.