You've got a big pile of dough set aside. Donald Trump's 2017 tax cuts, which are wealth-transfer friendly, expire at year-end unless Congress extends them. So, is now the time to give your heirs their inheritance?
It's a question that many people ponder. But like all money-related decisions, there are financial factors to consider. And there are pros and cons to weigh. "There is no stock or off-the-shelf answer," said Anthony Fittizzi. Fittizzi is managing director of wealth strategies at Bank of America Private Bank.
Coming Up With An Inheritance Plan
It's common to want to give away a chunk of your wealth during your lifetime to your kids, grandkids or other heirs. It can be satisfying to see your money make a difference in an heir's life. Your adult child, for example, could use the money to start a business, buy a home or repay a student loan.
"Why not help out now?" said asset protection attorney Blake Harris of Blake Harris Law. "Maybe give a child a better home that will appreciate more in value or help them avoid throwing money away on rent, or help send your grandchild to a better college."
At the same time, you must make sure you don't regret giving money and assets away before you die. You don't, for instance, want to put yourself in a financial bind later in life and risk running out of money. You must also weigh tax and estate-planning impacts.
Here's a checklist of things to consider before passing on your stock portfolio, vacation home or other assets to heirs during your lifetime.
Can You Afford To Give An Inheritance Now?
Ask yourself this question: Can I afford it? Run the numbers. See if you'll still be able to meet your own financial and lifestyle needs during your remaining lifetime, says Matt Chancey, a certified financial planner. He's also author of "Tax Alpha Solutions: Effective Tax Management Strategies for High-Net-Worth Investors."
"Will I have enough to be able to do all the things I need to do and want to do with a reasonable cushion or margin of safety if I give money away now?" said Chancey.
Factor in essential monthly expenses like housing, food and health care. But also consider the money you'll want to spend on discretionary purchases like vacations and dinners out.
Tax Impacts Of An Inheritance
Don't part with a penny, though, until you know the tax impact of giving money away.
In 2025, the IRS allows an individual to gift of up to $19,000 annually without any tax consequences for the giver or recipient. And the lifetime gift and estate tax exemption this year is $13.99 million per person. This is thanks to the Tax Cuts and Jobs Act of 2017 (TCJA) that is set to expire on Dec. 31, 2025.
"This is a big question mark," said Harris. "Is the gift and estate tax exemption coming down or is it going to be extended?"
The fact is that nobody knows if Trump will be able to get his tax cuts extended, adds Chancey. "There could always potentially be a change, right?" he said.
Know Your Exemption
Take advantage of the $13.99 million lifetime estate exemption.
Unless Congress extends the TCJA, 2025 will be the last year of the higher exemption amount. No matter what lawmakers do, high-net-worth folks with assets north of the $13.99 million per person exemption should set a plan, says Fittizzi.
Under current law, individual gifts up to the lifetime $13.99 million exemption are not subject to taxation from the giver or the receiver at the time of the transfer. The heir, however, would pay capital gains taxes on future sales of the assets inherited if they appreciate above the stepped-up cost basis.
What Will Congress Do?
In both scenarios – Congress extends the lifetime estate exemption provision, or it lets it expire — "there's a huge benefit potentially to gift (your money) now," said Fittizzi.
Here's why. If the $13.99 million exemption is not extended, and high-net-worth families don't act and gift inheritance money away this year, they risk missing out on giving away their assets in a tax-favorable way.
"If you don't gift away $14 million now, and the TCJA sunsets, you miss out on $7 million in tax-free gifting," said Harris.
On the flip side, if Congress extends the $13.99 million lifetime exemption, there are two solid reasons why it could make sense to give away an inheritance sooner rather than later. One, you are gifting an asset with capital appreciation potential to heirs. Second, you lock in the wealth transfer when the exemption remains at a lofty level.
"You're transferring all of that growth to the next generation," said Fittizzi.
Max Out The Step-Up
If you gift assets after your death, your heirs benefit from a preferential tax treatment. They get a step-up in the cost basis of an asset. In short, the assets they receive will be priced at the market value of the asset on your death, not the lower purchase price the giver paid.
The step-up eliminates the capital gain the heir must pay. Say the inheritance is a home purchased years ago at $100,000 but worth $500,000 at your death. The heir's cost basis is $500,000. The heir would avoid paying a capital gains tax on the $400,000 gain if they sold the next day at the market value of $500,000.
But there's a catch. There is no step-up in basis if assets are given away while the owner of an estate is still alive. So, in the example above, if a still-living mother and father give the home to their son as an early inheritance, the child will be subject to the capital gains tax on the home's $400,000 price appreciation upon the sale.
"When an individual transfers an asset as a gift to a beneficiary, they are transferring not only the value of the asset but also the tax cost basis of that asset," says Fittizzi. "The embedded gains could be subject to capital gains tax in the future."
Simplify The Inheritance Tax Jungle
There are ways to approach this tax quandary if you want to give away an inheritance while you're still alive, says Fittizzi. If the heir is in a low tax bracket now or expects to be in the future, for example, it could make sense to gift an asset with a low cost basis and high unrealized capital gains. This takes advantage of lower capital gains tax rates of 0%, 15% and 20%. If you don't want your heir to be hit with a sizable capital gains tax, you can gift assets with low, or no, unrealized capital gains.
"You need to be mindful of the taxation when you're giving away assets," said Chancey.
Taking Stock In Inheritance Rules
Let's say you have Nvidia shares that cost you $7 million and they are now worth $14 million. If you sell them yourself before giving them away via inheritance, you'll be on the hook for a capital gains tax. However, if you gift them, the heir will be on the hook for the capital gain, but only after he or she sells the shares.
Most personal finance pros recommend that any inheritance you give during your lifetime should be placed in an irrevocable trust. Set the heirs as the beneficiaries. "You gain a great deal of flexibility with a trust," Fittizzi said. You maintain control of the asset while you're alive. And you can also spell out how much money can be withdrawn in a certain time period. You can also outline what the money can be used for.
In addition, a trust also has an asset protection component. A trust also ensures the assets go to your intended recipient, says Harris.
If you don't structure the inheritance via a trust, there could be unintended results. "If you give away $1 million to your son, and the next day his wife files for divorce, you may have given away some money to your former daughter-in-law," said Harris.
