“You can’t take it with you. There are no pockets in a shroud.”– Elsie de Wolfe
Money: Of course you cannot take it with you, but how long should you try to hang on to it? Say you are retired and have more wealth than you will need to support you for the remain- der of your life. Should you begin gifting some of your assets to your chosen heirs while you are alive or have them inherit your wealth after you are gone? The answer to this question is very personal and will depend on several factors, including taxes, timing, and incentives.
Gift and estate taxes
Most gifts are not taxable at the time they are given, so feel free to gift generously to your heirs. As of 2023, there is a life- time gift exemption of up to $12.92 million per payor. But keep in mind, you (or your estate) will incur taxes if your lifetime gifts exceed that amount.
In addition to the lifetime gift exemption, there is an annual gift exclusion that allows you to gift $17,000 per year to another individual with no impact on your lifetime gift exemption. For example, a married couple with three children can gift those children $102,000 per year ($17,000 x 2 parents x 3 children) without impacting the parents’ lifetime gift exemption.
As of 2023, the tax exemption for estates is the same $12.92 million, as it is “unified” with the lifetime gift exemption; any gifts you make beyond the annual $17,000 exclusion will decrease your remaining estate tax exemption dollar for dollar. So from the perspective of your estate, gifting (beyond the $17,000 annual exclusion) and bequeathing are mostly the same. But they are not the same from your heirs’ perspectives, due to taxes that they may have to pay.
Capital gains tax
Whether your assets become gifts or inheritance, your heirs usually face no tax liability on them: Any gift taxes or estate taxes due are typically your or your estate’s liabilities. However, if you gift appreciated assets during your lifetime, those assets’ original cost basis transfers with the gifts. So when an heir sells a gifted asset, that person may be subject to a capital gains tax.
Under current tax law, this is not the case with inherited assets. Appreciated assets that are bequeathed receive a “step-up” in basis, which resets the cost basis to their value on the date of your death, effectively eliminating the capital gains tax liability. This significant advantage of bequeathing over gifting, though not the only consideration when deciding between the two, should always be part of your decision process.
One of modern society’s cruel jokes is that children often have the greatest need for their inheritance in the early years of their parents’ retirement, which is when their parents still need the money. Then, by the time their parents are gone, many children have become financially secure and may not need the inheritance. From this perspective, if you are inclined to give, you should gift as much as you can comfortably afford during your lifetime, while remaining aware of the available step-up in capital gain basis for inherited assets. So, gift your assets that have minimal gains and save your most appreciated assets for inheritance.
We have all seen examples in which the children of wealthy individuals are unmotivated to succeed on their own due to the wealth they have already been gifted or the future wealth that is on the way. If properly incentivizing your children is a concern, there is a clear disadvantage to gifting your wealth to them outright.
If you choose instead to have your children inherit your wealth at the time of your passing, it is easier to properly incentivize them by concealing the full extent of your wealth from them during your lifetime and even limiting their access to it after you are gone. Inherited assets can be held in an irrevocable trust that distributes a portion of the assets to your heirs on a regular basis, restricts their access until they reach a certain age, restricts the nature of the goods and services they can purchase with the assets, or reflects any combination of restrictions you wish. In contrast, assets that you gift outright become the sole property of your heirs upon receipt, they can be spent at any time for any purpose, and they can be subject to creditor claims.
You can’t take it with you
In some ancient cultures, wealthy individuals were often entombed with their jewels and other treasures in an effort to bring them along into the afterlife. That seems like holding on a bit too long, but we are faced with even more difficult financial decisions in modern times: When and how should we pass on our wealth to subsequent generations?
For starters, if you think your estate will exceed the exemption amount, consider gifting as much of the $17,000 exclusion amounts as you can afford to each year. From there, the tax, timing, and incentive considerations become very complex very quickly, so consult with your legal, tax, and financial advisors for a strategy that will fit your family’s goals.
Heritage Investment Group provides wealth management and investment guidance to high-net-worth individuals, families, charitable foundations, and qualified plans. We provide seasoned financial guidance backed by a disciplined investment process. For over 25 years, we have built our firm on a strong foundation of family and friendships with guiding principles of ethics and integrity.
The original version of this article was written by Heritage for the January/February 2022 edition of The Light, a local magazine serving Broward County, Florida.