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Estate Preservation: Lifetime Gifts

Until the federal estate tax is repealed in 2010, you can transfer more assets with lower gift and estate tax consequences through lifetime gifts than through testamentary gifts, or bequests through a will.

During your lifetime, you can take advantage of the annual gift tax exclusion of $11,000 that is not available to a gift given through a will. Also, during your lifetime, you can make gifts of property that will appreciate. Keeping the appreciation out of your estate lowers the estate tax consequences on the transferred property.

After the repeal of the estate tax, though, the affect of capital gains tax on a lifetime gift may be greater than the estate tax.

How the 2001 Tax Act Affects Lifetime Gifts
Before the Act, it was possible to completely protect a lifetime of appreciation in value from capital gains income taxation. The 2001 law put a limit on the basis "step-up" benefit.

Still, if you give a will-given gift with a step-up benefit, the property remains part of your estate. And if your estate is large enough to be hit with estate tax, that tax begins at a rate (41%) twice as high as a capital gains rate (20%) your beneficiary would get if you gave the property during your lifetime.

With the repeal of the estate tax in 2010, there will be a modification of step-up in basis. The income tax basis of property owned by a person at death will no longer be allowed an unlimited "step up" to its fair market value on the day he or she died. Instead, a basis step-up of only $1.3 million will be given, with an additional $3.0 million in step-up allowed on property passing to a surviving spouse.

Definition: "Step-up benefit" refers the increased value of the gifted asset from what it originally cost to its current value at the time of death. So if the recipient sold the gifted property, there would be no capital gains for income taxes.

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Estate Preservation: Lifetime Gifts

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