In the last post I discussed some of the issues surrounding gifting the family vineyard to your family. There are a number of reasons that a person or a couple might consider just giving their property. However, the primary factor in that decision process is: control over the decision. If you make a gift, that means that you are alive and able to consciously make the decision to give your property to another person, family or otherwise.
If you are dead, then you can no longer consciously decide. Your property is distributed the way your estate plan dictates. Now, if you’ve done a good job preparing your estate plan, then that distribution may happen exactly the way you wanted it to. Or maybe not…you just won’t know for sure…because you are dead.
So the trade-off between giving property during your life (gifting) and leaving property to someone in your estate (a bequest) is that of trading off decision making control for tax benefits in the form of a step-up in basis. Let me explain.
Let’s use the previous example, and say that you originally bought your 100 acre Napa vineyard in 1978 for $200,000. You planted some grapes, raised your family, and enjoyed the farm life of growing grapes. Now, forty years later, that vineyard with prime Napa Cab is valued at $250,000 per acre. The property is worth $25 million. If you sell it, you have a capital gain on the value it sells for, less what you paid for it ($25 million – $200,000), and will pay capital gains taxes on that amount, approximately $5 million.
However, if you leave it to your estate, your heirs will receive a “step-up in basis” on the property. That means that for tax purposes they will acquire the property at it’s current value, basically what it’s worth upon your death. After they jump through the hoops to get the property properly titled in their names, they will be able to turn around and sell the property without incurring any capital gains tax.
That is a pretty nice perk of receiving property as an inheritance. Again, the only thing you must do to be able to take advantage of this perk…is, well, give up control…forever.