Retirement & Financial Planning Report

For several reasons, it pays to make taxable gifts while you’re alive rather than wait until death.

  • Post-transfer appreciation is out of your estate. Suppose, for example, you give $500,000 worth of stock to your daughter Mary in 1999, using up $500,000 of your gift/estate tax shelter. At the time of your death, 16 years from now, those stocks are worth $2 million (that’s a 9% compound annual return). No additional gift or estate tax is due. If you had retained those stocks, you would have $2 million worth of stock to leave to Mary, who would owe a sizable amount of estate tax.

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  • Lifetime gifts may qualify for valuation discounts. Suppose you own an apartment building valued at $1 million. During your lifetime, you give away 20% of the building to each of your three children. On paper, each gift is valued at $200,000 (20% of $1 million). However, because each gift represents a minority interest in the building, the valuation may be discounted to $150,000 or $160,000 for gift tax purposes.

Note: Such discounts should be supported by an independent appraisal. Valuation discounts must be revealed on gift tax returns but the IRS has only three years to challenge gift tax valuations. After the three-year period lapses, the IRS can’t challenge gift valuations on an estate tax return.