Gifts and Tax Planning: Transferring Appreciated Assets

There are a number of motivations to give a gift to loved ones during life; however, it is important to remember that certain assets are taxed more favorably if they are given after the owner’s death.  As discussed in my recent blog post, The “Basis” for Good Planning: Using “Stepped-Up” Basis to Reduce Taxes, assets that are subject to long-term capital gains are granted a significant income tax advantage, a “step-up” in basis, if they are held until the owner’s death.[1]

First generation business owners may be presented with this issue when they want to give their children a current stake in the company that they have built.  While nothing is more natural then wanting to watch our children succeed during our lifetime, with planning we may be able to achieve some underlying practical goals while still utilizing the tax advantages presented by holding a significant portion of the asset’s value until death.  For instance, by utilizing a well-structured shareholder agreement, business owners can grant their child a minimal interest in the business and a position in the company as a means to (1) establishing the child’s role in the business, (2) train the child to manage the business, (3) provide a current income stream and job stability, and/or (4) provide the child an immediate incentive to focus on the business’ success.  By granting the child a minimal stake in the company, the business owner has have both created a structure to transfer the company at the time of your passing and maintained the bulk of the asset’s value in your hands in order to capitalize on the capital gains tax advantages associated with a step-up in basis.

Although this type of planning must be carefully weighed against the estate tax advantages presented by certain types of lifetime transfers, in the right circumstances, the advantages of the “step-up” in basis may outweigh the estate tax benefits of certain lifetime transfers.  Accordingly, before making a substantial gift of your assets it is important to first identify any extraneous or ancillary goals that you hope to achieve by making the gift and meet with your advisors regarding the best structure for the gift.

Royce Lanning

Phone: 281-367-1222

Fax: 281-210-1361

[email protected] 

__________________________________

[1] In summary, an asset given during life continues to be subject to the same or similar capital gains taxes as it was in the hands of the donor while an asset that is given after the donor’s death could be sold on that same date and not be subject to any capital gains tax.