Many taxpayers want to make gifts of assets to their children or grandchildren while they are alive. Seeing their hard work benefit someone they love is extremely gratifying for many.
Unfortunately, most taxpayers are relatively unsophisticated in both income and estate tax laws, and the unintended consequences of gifts done improperly could cost your beneficiaries dearly. To make matters worse, do not assume your attorney is aware of these laws either. We have witnessed many gifts promulgated by a client’s generalist attorney that are as bad as those we see when gifts are made without consulting a professional.
The first issue is that of tax basis. Gifted assets in the hands of a new owner have what is called a carryover basis. This means the tax cost in the hands of the new owner is the same as it was for the old owner. If this gift is comprised of an substantially appreciated asset, that also means the grantor is also giving the recipient their future income tax bill.