Should You Gift Your Appreciated Assets During Your Lifetime?

A few months back I wrote about a financial gift that my parents made to my husband and me. While it wasn’t a huge sum of money, it helped us purchase a better first home than we would have been able to buy on our own, and it helped set us up for long-term financial success, too. And, as I wrote, the gift also benefited my mom and dad, in that we were able to help them age in place because we lived close by. My point was that gifting during your own lifetime, while you’re around to see the benefits of that gift in action, can beat leaving assets for your heirs to inherit after you die. As the saying goes, it’s better to give with a warm hand than a cold one.

My parents gave us cash for that home down payment, but could the gift have been a win-win-win if they had gifted us appreciated securities instead? Possibly, though the answer isn’t as straightforward, taxwise, as is the case when gifting appreciated assets to charity. And if saving on taxes is the main criterion when deciding whether to gift an appreciated investment during your lifetime or have that asset pass to heirs after you die, the latter will almost always be more advantageous. (I’d question, though, whether taxes should be the decisive factor in any such choice.)

Tax Treatment of Gifted Assets

Many investors have been schooled on the tax benefits of gifting appreciated assets to charity. For starters, the donor can take a tax deduction equal to the fair market value of the shares, assuming the donor’s itemized deductions exceed the standard deduction in the year of the gift. Alternatively, people who are age 70.5 and over can employ what’s called a qualified charitable distribution from their tax-deferred accounts like traditional IRAs. The QCD amount won’t be included in taxable income, can satisfy their required minimum distributions, and will reduce the amount of future RMDs. And most important of all, gifting appreciated securities to charity effectively negates any taxes on that appreciation. If your cost basis on a holding is $2 but it’s now worth $2 million, no taxes will be due—to you or the charity—on that appreciation.

Similarly, if a loved one receives an appreciated asset from you after you’ve died, the appreciation on that asset over your lifetime escapes taxation. When the recipient of the appreciated asset eventually sells, they will owe taxes only on appreciation that occurred after the date of your death.

By contrast, any type of lifetime gift to a human won’t yield a tax benefit to the donor when he or she makes the gift. And if the security has appreciated since the donor’s original purchase of it, the recipient of the gift will still owe taxes on that appreciation. The taxes due will be based on the donor’s cost basis rather than the cost of the shares when the giftee took ownership of them.

For example, let’s say Carmen acquired 1,000 shares of stock at a cost basis of $2 per share. Three years later, the stock is now trading at $200. Carmen’s cost basis is $2,000 and she has $198,000 in appreciation.

If Carmen gave her niece Martha those assets while she was still living, Martha would inherit Carmen’s cost basis from her. Martha’s cost basis is also $2 per share, and when Martha sells the stock she’ll owe capital gains tax on the spread between $2 per share and whatever the sale price is.

On the other hand, If Carmen were to die holding the stock and leave it to Martha, Martha’s cost basis in the stock would be whatever it was on the date when Carmen died. If the shares were worth $200 apiece at that time, all of the appreciation that occurred over Carmen’s lifetime would escape taxation. With a cost basis of $200 per share, Martha could sell the shares right away and the only tax she’d owe would be any appreciation in the shares over the $200 per share price.

When the Strategy Makes Sense

Without a deduction or step-up in cost basis, you might wonder why someone would contemplate lifetime giving of appreciated assets at all. The chief benefit is if the recipient would owe taxes at a lower rate than the donor would. The cost basis is what it is, but the actual taxes due upon the sale of the security vary based on each individual’s tax rate.

To use a simplified example, let’s say Martha, the recipient of the appreciated shares, is in the 15% tax bracket for long-term capital gains and Carmen is in the 20% tax bracket. Carmen would owe $39,600 if she were to sell the stock while she owned it herself—her $198,000 in appreciation multiplied by her 20% tax rate. Martha’s tax bill would be $29,700—the $198,000 spread between her cost basis (what Carmen paid for the shares) and her sale price multiplied by her 15% capital gain tax rate. The differential would be even greater if Martha paid capital gains at a 0% rate. In 2024, single filers with taxable incomes below $47,025 and married couples filing jointly with taxable incomes of less than $94,050 pay a 0% rate on long-term capital gains. (Note that the capital gain would count as part of taxable income, so larger stock sales generally wouldn’t qualify for the 0% rate.) If the gift of appreciated securities is in excess of $18,000—the gift tax limit in 2024—the donor has to file a gift tax return and the amount counts against the donor’s lifetime gift/estate tax exemption. But it will rarely result in the donor owing gift tax, because the lifetime gift/estate tax exemptions are so high today. (That exemption amount is poised to go lower starting in 2026, barring congressional action.)

College-Funding and Kiddie Tax Implications

Transferring wealth in this fashion might naturally seem appealing to parents and grandparents of children and young adults. Not only do older adults often have a strong motivation to provide financial help to the younger generation, but the tax savings from the transfer stay within the family. And younger people—for example, those who are still in school or in lower-paying jobs—are more likely to land in the 0% tax bracket for long-term capital gains than are older adults.

However, there are some important caveats to bear in mind when contemplating a gift of appreciated assets to a younger family member, and they could limit the utility of gifting in this fashion. For one thing, if the child or grandchild is approaching college age, the gifted assets could affect financial aid eligibility. If the child sells the assets, that could boost taxable income; if he or she retains the stock, dividends could also increase income, which in turn could affect financial aid.

Moreover, what’s called the “kiddie tax” comes into play on unearned income—for example, gifted assets—for young people under the age of 18 and full-time students under the age of 24. The tax is meant to discourage parents from skirting capital gains taxes by transferring appreciated assets to their children. The specific calculation is complex and has changed a bit over the past several years, but the main idea is that unearned income over the kiddie tax thresholds is taxed at the parents’ tax rate. In other words, the tax savings might be modest if the gift will be subject to the kiddie tax.

‘Upstream Giving’

A related strategy, dubbed “upstream giving,” involves an adult gifting appreciated assets—say, company stock—to an older parent who in turn makes the child the beneficiary of those same assets. When the older adult passes away, the appreciated assets benefit from the “step-up” in cost basis that I discussed earlier. That means that the recipient—in this case, the original owner of the appreciated asset—won’t owe taxes on the gain. The strategy has also been posited as a way for adults whose estates would otherwise be subject to the estate tax to transfer assets to parents whose estates come in well under the current thresholds.

That might seem clever, but the strategy entails significant risks. One is simply that the older adult isn’t legally bound to make the adult child the beneficiary of the asset and is free to sell it, spend the money, or give it to someone else. There are also no guarantees that the older adult will predecease the younger one. The gift of the appreciated asset could also push the older adult into a higher tax bracket during their holding period, especially if the security pays income on an ongoing basis. Additionally, if the older adult might need government-provided long-term care, the infusion of additional assets could disqualify them from those benefits. Finally, if the original owner transfers the assets to an older adult who dies within a year after receiving the assets, the inherited assets (by the new beneficiary) won’t qualify for the step-up.

Needless to say, deciding how to handle appreciated assets is a complicated business. That makes it worthwhile to consult with an estate-planning professional to help balance tax considerations alongside the truly important considerations of who you want to inherit the assets and when.