Tax Implications of Lifetime Transfers vs. Transfers at Death

Bacon, Peter W.; Hereth, Russell H.; Williams, Richard E.
June 1998
Journal of Financial Planning;Jun98, Vol. 11 Issue 3, p72
Academic Journal
This paper develops a model that is useful in analyzing the tax considerations involved in deciding between lifetime transfers or transfers at death. There are three commonly cited transfer tax advantages to lifetime gifting of appreciating assets. First, use of the annual exclusion and unified credit. Second, excluding post-gift appreciation from taxation to the donor. Third, avoiding the gross-up rule. The transfer-tax advantages of gifting must be weighed against two major disadvantages, including loss of step-up in basis, which affects potential capital gains taxes and an opportunity cost related to prepayment of the transfer tax. The simulation model allows for efficient examination of the key variables and assumptions that affect the gifting decision. Deferring the realization of the capital gain will always reduce the present value of the capital gains tax and increase the net gain from gifting (NGG). This holds for any discount rate or growth rate assumptions. One concept that many potential donors find difficult to accept is that it can be advantageous to prepay the transfer tax. If a gift tax is paid, the NGG is also affected by the opportunity cost of foregone earnings. The higher the potential appreciation rate on the asset used to pay the gift tax, the lower the NGG. I general, a high marginal transfer-tax rate, a high expected rate of appreciation on the relevant property, a relatively long life expectancy for the donor and a high basis all favor lifetime transfers.


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