Younger generations can give assets to older relatives to help them with living expenses while also devaluing their estate and lowering the amount of income taxes they pay. Giving valued assets to elderly relatives with low property appraisals can lead to a potential step-up in the basis of the assets acquired after that senior relative passes away. To guarantee assets are used and managed according to the donor’s wishes, it’s critical to have a high level of confidence or to integrate trust planning before gifting appreciated stock to family. According to recent studies, seniors are increasingly demanding outside support, including those from their young children and relatives.
Nearly one-fifth of millennials and GenXers polled by TD Ameritrade indicate they are now assisting or planning to help an older family member boost their retirement expenses. It is the most obvious motive for gifting appreciated stock to the family.
Tax implications
Consider if a gift tax could be due on the transfer of assets when considering upstream transfer or gifting of any sort. They can use this exemption to give presents to others throughout their lifetime or after they pass away. Gifts or transactions conducted more than this amount are subject to a 40% gift tax.
When determining the quantity and approach for upstream appreciated safety donations, it’s critical to make sure that any gifts are made within the yearly exclusion limitations so that the donor party doesn’t risk exhausting their lifetime exemption by the value of their inheritance. Because regulations change frequently, it’s critical to stay current on any laws or legislation about the step-up in fee basis for inherited assets.
Potential downsides
Though there may be significant tax benefits in some cases, arranging a completed gift has the potential to be costly. At their base, completed gifts indicate ownership. As a result, the recipient has the legal right to sell and spend the property, as well as give it away or transfer it to somebody other than the original owner. Property may also be forfeited or divided as a result of legal action taken against older relatives. It’s critical in instances like this to have a high level of trust in the person who will be receiving the gifts. There are solutions available for donors who are unsure whether or not their relatives will carry out their desires.
Rather than transferring assets to the family directly, donors could place them in a trust. They could put instructions in the trust to benefit the older relatives but limit their authority over how the assets are spent. The contributing party would give the older kin an overall power of appointment over trust assets so that they would be held for the donor party after the elderly relative died. If assets are not liquidated or spent, the option to receive a possible step-up in basis is preserved. It also gives the trust the option of being generation-skipping tax-exempt. This also aids in the avoidance of any estate taxes upon the donor’s death.
