For many years, the focus of estate planning was the gifting of assets during one's lifetime to remove the appreciation from his or her estate and reduce estate taxes at death.  In 2015, the federal estate/gift exemption is $5,430,000 per person. The amount is adjusted annually for inflation and will be increased to $5,450,000 in 2016.  Transfers in excess of the exemption amount are subject to the estate tax rate of 40%. For taxpayers who are in the top income tax bracket of 39.6%, the capital gain rate is 20% and there is an added 3.8% tax on net investment income.  When you factor in state tax rates, the differential between the estate tax rate and the income tax rates are not as drastic as they were in the past.

Taxpayers are now faced with the decision to gift assets during their lifetime or to retain low-basis assets until death to obtain a step-up in basis. When a recipient receives an asset, the tax basis depends on whether the transfer is by gift or inheritance.  With a transfer by gift, the recipient takes the donor's basis in the property, which is referred to as "carryover" basis.  Alternatively, property received by inheritance generally assumes the property's fair market value at the date of death.  This is referred to as "stepped-up" basis.  A primary tax benefit of gifting during lifetime is that the asset's future appreciation is removed from the owner's estate, potentially saving federal and state taxes.  A detriment to gifting is that the recipients lose the favorable step-up in basis at death and will possibly pay income tax on the built-in gain.  (Continue)