A common question I hear from clients as a Texas estate planning attorney is whether they should leave their entire estate to their descendants (i.e., kids and grandkids) after they die or whether they should begin to give some of their estate assets away while they are still living. An article on nerdwallet.com recently discussed some common financial mistakes, and gifting assets was listed as one of these mistakes. However, there is no textbook answer to this question, and several things need to be considered before giving any asset away during your lifetime, such as:
How much did you pay for the asset? The price you paid for an asset is your “basis” in the asset. For instance, if you bought some stock for $10,000 in 2005, then your basis in the stock would be $10,000. If you sold that stock in 2014 when it is worth $50,000, you would owe tax on $40,000, since that is the level of gain (or profit) on the sale. If you give that stock to your child while you are still alive, your child’s basis in the stock will remain $10,000 (this is known as “carry-over basis”). However, if you wait until you die and leave the stock to you child in your Texas Last Will and Testament, your child’s basis in the stock will be the fair market value of the stock on the date of your death ($50,000 in this example, assuming you died in 2014). You can see from this example that from an income tax perspective, it can be advantageous to wait until your death to leave assets to your children. However, there may be other factors that weigh heavily in your decision regarding whether you should gift assets during your lifetime. Additionally, if you are gifting assets that have increased in value to a charity, it may actually benefit you from an income tax perspective, so you should work closely with your financial advisor and estate planning attorney to make this decision.
How responsible are your kids? There are some advantages to gifting assets to your descendants. First, you will be around to see your loved ones enjoy some of the wealth you have imparted to them. This can mean a big improvement in the quality of life of both you and your descendants. Unless you have used up your lifetime gift and estate tax exemption amount, there will generally not be any gift taxes that must be paid (although you may have to file a gift tax return for gifts over $14,000 to individuals in a given year). Another advantage of lifetime gifting to descendants is that it provides you with an opportunity to see how well your children will handle an influx of cash or other assets. This can provide you with some value insight as to how they will manage the assets in your estate after you die, which may help you decide who should receive your assets when you’re gone.
Will you need the assets to live? Life expectancies continue to increase, which means you’ll likely live longer and need more money to live on that your parents did. The downside of gifting an asset is that once it’s gone, you can’t get it back. As a result, before giving away an asset, you need to carefully consider whether you will need this asset to support your livelihood at some point in the future.
There are a number of considerations and questions that need to be asked and answered before you begin giving your assets away during your lifetime. You should contact a qualified estate planning attorney for help in implementing a lifetime giving strategy.