Article on Lifetime Transfers of Appreciating Assets

David A. Handler & Patricia Ring recently published an Article entitled, Lifetime Transfers of Appreciating Assets: When Does It Pay?, Tr. & Est. 74 (Jan. 2017). Provided below is a summary of the Article:

The American Taxpayer Relief Act of 2012 (ATRA) solidified the irrelevance of the federal estate tax for all but a tiny percentage of the American population by setting the federal estate tax exemption at $5 million, indexed for inflation. “Portability,” which allows a surviving spouse to use any unused portion of his last deceased spouse’s federal estate tax exemption, became permanent law. As a result, with minimal planning, a married couple can now transfer nearly $11 million to their children and/or other non-charitable beneficiaries at their deaths without incurring any federal estate tax. 

The basis of appreciated assets that are included in a taxpayer’s estate is stepped-up to fair market value (FMV), eliminating any built-in gains on these assets. This is true even if the taxpayer’s estate isn’t subject to estate tax (for example, the estate is less than the federal exemption or passes to a surviving spouse).

Given the higher tax rates for capital gains, this basis step-up is more valuable than ever. Even those few taxpayers who still have taxable estates should think carefully before making lifetime transfers of assets to their beneficiaries. Although such transfers would remove the transferred assets (and any post-transfer appreciation) from their estate for estate tax purposes, the basis of these assets wouldn’t be stepped-up at their deaths. As a result, substantial gains could be recognized and taxes on such gains payable when such assets are later sold by the transferees. 

It isn’t easy to determine whether the benefit of the estate tax savings that will be achieved by transferring an asset during a taxpayer’s life will likely outweigh the cost of subsequent capital gains taxes when the recipients later dispose of the asset. As we’ll discuss, the lower the asset’s basis as a percentage of its value, the more the asset must appreciate for a lifetime transfer of the asset to provide a net tax benefit.