When one thinks of a gift of significant assets, it is most often one from a parent or grandparent to their children or grandchildren. This is often done to allow the older generation to reduce the size of their estate for federal or New York tax purposes or for elder law and asset protection planning purposes.

Because the federal estate and gift tax exemption as of Jan.1, 2018 is approximately $11.2 million per person and the New York estate tax exemption is $5.25 million per person, the vast majority of New Yorkers will never pay any federal or New York estate taxes. It should be noted that the federal exemption sunsets on Dec. 31, 2025, unless it is extended by law. If it is not extended or made a permanent exemption, the exemption returns to approximately $5.49 million (as increased for inflation).

Such a large estate tax exemption places greater importance on the cost basis of assets when they are inherited and the potential for income taxes (capital gains taxes) upon the sale of the assets by the person who inherits them. Thus, the question is: Does it make financial sense for one to gift assets with a low-cost basis to his or her parents or grandparents with the understanding that he or she will later inherit said assets from the older generation at their fair market value on the date of death of the older generation? Effectively, this strategy would return the assets to the child with its cost basis stepped up to the fair market value on the date of death of the parent or grandparent.

As strange as this might appear, it might be an effective income tax planning technique so long as the younger generation making the gift of the low-cost basis assets can do so without paying gift taxes and be assured of inheriting the assets gifted. Obviously, an $11.2 million per person federal gift tax exemption is a valuable arrow to have in one’s quiver. It is also important for the person making the gift to the parent or grandparent to have sufficient confidence and trust that the property gifted will be left to him or her by his or her parent or grandparent.

If the planned gift to the older generation is implemented, the potential capital gains tax savings could be significant. For example, the child owns stock in a publicly traded corporation that he or she purchased at $25.00 per share which is now trading at $100.00 per share, and the total value of the stock has risen from $250,000 at the time of purchase to a present value of $1,000,000 and is expected to further appreciate. If the stock were to be sold, there would be a long-term capital gains tax on the $750,000 dollars of appreciation (approximately $232,500 for federal and New York state income tax purposes).

Rather than incurring the above stated capital gains tax, suppose the child gifts the stock to his or her parent, utilizing only a small portion of his and his spouse’s $11.2 million dollar gift tax exemption. If the parent owns the stock for a period longer than one year before his or her demise, the child who originally made the gift (who now inherits the stock) receives the stock at its fair market value at the parent’s date of death (presumably a value greater than the $1 million with appreciation), thus avoiding any capital gains taxes unless the stock is sold for more than its fair market value on the parent’s date of death. The income tax savings are significant (approximately $232,500) while no taxable impact was created for the parent.

A similar result can be achieved if the child creates a trust for the benefit of the parent (who has a power of appointment) and then funds the trust with low cost basis stock or other assets. The use of the trust will also avoid the one-year ownership requirement and could allow the stock to remain in the trust for the child so that it is not subject to the claims of his or her creditors.

Anthony J. Enea, Esq., is a member of the firm of Enea, Scanlan & Sirignano, LLP of White Plains, New York.  His office is centrally located in White Plains, and he has a home office in Somers, New York. He can be reached at  (914) 948-1500.     Mr. Enea is the past chair of the elder law section of the New York State Bar Association (NYSBA). Mr. Enea is the past president and a founding member of the New York Chapter of the National Academy of Elder Law Attorneys (NAELA).  He is also a member of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys. Mr. Enea is also the president of the Westchester Bar Foundation and a past president of the Westchester County Bar Association.