As individuals near their final years, they often begin to think about their assets, accounts, and possessions. Who will receive property and funds? Which loved ones will benefit most? The idea of giving gifts can be appealing—especially if people think it may save their estate and their loved ones from a hefty tax bill. Or they may expect that a gift will help avoid probate for that asset. But this phenomenon, called deathbed giving, is not often a very good idea, according to experts.
What Are the Cons to Deathbed Giving?
Deathbed giving can negatively impact the tax bill of your heirs down the line in many cases. Most Americans do not have to worry about exceeding the approximately $13 million exemption on estate taxes. Getting rid of an asset that would otherwise neatly fit within that exemption can be problematic in terms of capital gains taxes. For example, say you have a second home that effectively has a zero tax basis. If you gift your second home to your children before your passing, and they someday sell that home, they would have to pay capital gain taxes on the proceeds of the sale—the difference between what you bought the home for and any appreciation in value. The tax basis carries over.
But in a scenario where your property remains in your name, it will be wrapped up in your taxable estate. When it is in your estate, the tax basis will become the value of the home, rather than the value you purchased it for—the asset will receive what is called a step up in income tax basis. When your heirs sell the property for a value close to the tax basis, the capital gains will be minimized. The taxes associated with the estate fell within the $13 million exemption, and Texas has zero inheritance tax.
Are There Exceptions?
Of course. High net worth individuals may find that gifts actually help to reduce their tax bill. Working with a skilled estate planning attorney with experience helping high net worth clients is the best way to determine the right plan for you and your loved ones.
In addition, certain types of assets, such as depreciable farm assets, benefit most from the step up in tax basis. In any case, the difference between the capital gains taxes from a gift and how that asset will be taxed as part of your taxable estate can be significant. It is worth consulting with experts to figure out the best course of action.
Do You Need a Houston Estate Planning Attorney?
Tax basis can be a tricky concept, and planning for estate taxes is complex. An experienced team of estate planning attorneys can help you navigate the process in a way that minimizes the headache for your family. The team of Houston-area attorneys at McCulloch Miller, PLLC have decades of combined experience in estate planning. Contact our office at 713-936-9073 to schedule a consultation with an attorney on our team.