Gifts and Estates
Blog contributed by Roy Ice, CPA & Partner with Kemper CPA Group LLP.
Clients are often concerned about the legacy that they will ultimately leave behind. There is usually someone that they want to make sure is taken care of and that typically means a transfer of assets of some kind. Assets can be gifted during the individual’s lifetime or transferred upon their death. The tax
treatment is very different for these two options so it deserves some consideration.
A gift has important characteristics including its basis (generally what you paid for it) and its value (what it’s currently worth). The donor’s basis of a gift is generally transferred to the recipient but for gift tax purposes the current value of the asset is considered. The IRS starts to become interested when the total value of gifts from one individual to another individual exceed $15,000 in any one year. At this point a gift tax return is required to report the gift. If that makes you think twice about giving, note that this is a reportable gift but it is not taxable to the recipient; although it is not deductible by the donor either. Cash is a good candidate for gifting because its basis and value are always equal.
Before you give the family farm away, it is important to consider your options. Instead of gifting an asset you could update your will and allow your wealth to transfer to your heirs through inheritance. You won’t be around to see it, but it does come with some nice tax benefits. Unlike gifts, the basis of inherited assets are marked up to whatever their current value is at the time of death. Therefore, if an asset has appreciated over time, a transfer at death could be the better option from a tax perspective. The logic is that any potential taxable gain (the amount received in excess of your basis) will be reduced or eliminated if the inherited property is sold at a later time by the beneficiary with the new “stepped up” basis.
A beneficiary can be an individual, trust, or another legal entity such as an LLC. The best type of entity will depend on the specific situation. A revocable trust, for example, is great at avoiding a lengthy probate process but is generally not a good tax planning tool due to high trust income tax rates.
If you are planning for your ultimate estate, the Federal estate tax rate is currently fixed at 40%. That sounds pretty steep, but there is an exemption of $11 million per individual or $22 million for a married couple, if properly executed. Indiana residents can take comfort in the fact that there is no estate tax at the state level but that may not be the case for others. Illinois, for example, has a graduated estate tax of up to 16% for estates worth over $4 million. If you are planning a significant gift or just general planning for your estate, it is worth having a conversation with your advisor before the future is set.
