Estate and Gift Tax Planning Basics
Mar 1, 2021 | Written by: Share|
There are two ways to transfer assets for estate planning and asset protection planning purposes. You (“Donor”) can either gift-transfer the assets to the beneficiary (“Donee”) during your lifetime, or you can transfer the assets to the beneficiary through your estate at death. Depending upon which method is used, a very different income tax result is obtained.
New Jersey has no gift tax; and the federal gift tax is essentially irrelevant because a person can, at present, transfer assets by way of gift in excess of $11 million before the federal gift tax will apply.
A major difference results in the tax basis of the Donee. The carry-over tax basis rules apply to lifetime gifts. That is to say, the tax basis in a gifted asset remains unchanged when it is transferred by gift from the Donor to the Donee. If the Donor makes a gift of highly appreciated property, then the Donee will be required to pay a capital gains tax when the property is sold based on the difference between the price for which the asset was sold and the tax basis in the original gifted property when it was in the hands of the Donor.
However, appreciated assets that are transferred to a beneficiary through an estate receive a “step up” in tax basis, such that the subsequent sale of the inherited asset by the estate beneficiary does not result in payment of capital gains tax, absent appreciation in the value of the asset after the decedent’s death.
The foregoing rules must be understood for a family to adequately prepare for asset protection planning. Frequently, parents will gift transfer significant assets to their children to insulate those assets from responsibility for payment of the parents’ anticipated long-term health care costs. However, if parents transfer a highly appreciated asset to children (such as the family home), the resulting capital gains tax payable when the asset is sold by the children could be significant.
There are estate and gift tax planning techniques that can be used in conjunction with asset protection planning to achieve a more beneficial tax result for the family. Please call us for a consultation.