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Ask Lane Your Own Question
Category: Tax
Satisfied Customers: 11822
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Following is the question raised by the professor. If property

Resolved Question:

Following is the question raised by the professor.
If property is acquired by gift, the person acquiring the property has a basis in the property equal to the basis of the person who gave the property as a gift. If property is acquired by inheritance, the person receiving the property has a basis in the property equal to the fair market value of the property at the time the owner of that property died. Does that difference in determining basis make sense? Why is there that difference? Isn’t there a potential opportunity to avoid taxes involved in that difference?

A student responded with the following. I am having problems with her logic. Can anyone help me understand what she is trying to say and whether her statements are a valid argument?

All of you have made very good points, but I am going to take a different approach on this topic and say it does not make sense (cents)!

A person who acquires property via a gift (assuming that a gift tax return is required and that the FMV is greater than the basis) as the cost basis of the person who made the gift. On a gift tax return it is the FMV of the property that reduces the unified credit. So when the person making the gift dies the FMV of the gifts given are taken into account since the unified credit available for the estate tax return have been utilized. So since the credit is reduced the timing difference does not make sense, and the person receiving the gift should acquire the gift for the same amount that was used on the gift tax tax as the FMV. The record keeping would be much easier, since that amount would be used to calculate the gains of loss on the sale of the property.

Another reason it should be changed is if the person gives property where the FMV is lower that the cost basis. Why would someone do this... I am not sure, but let's say they did. The calculation on the sale of the property is a nightmare. You have to know the cost, the FMV at time of transfer, and then remember that when the property is sold, that the loss it not a matter of the sales price less cost, but you have to take into account the FMV and reduce the loss. If the law was changed you would only be concerned with the FMV at time of transfer.

One benefit of gifting is to gift property that you know or feel will greatly appreciate in value after the time of the gift, to save the unified credit down the road.
Submitted: 3 years ago.
Category: Tax
Expert:  Lane replied 3 years ago.

NPVAdvisor :


NPVAdvisor :

What is your question?

NPVAdvisor :

There are several policy reasons for the step up ... Remember, when the estate system was first revised in 1976, estates of 600,000 were taxable ... so taxing the estate itself (through the 706 for m, federal estate tax - thereby reducing what the heirs receive) and then taxing the those heirs on a potentially huge capital gain once they sell it would be, for many, an effective double taxation

NPVAdvisor :

Some believe that their are practical reasons ... When Grandpa passes a farm, that was once a working dairy, that was bought at one price then improvets made, then part of it was sold to a brother , etc, etc trying to figure out what that adjusted basis really is when the heor finally sells, could be a tax administration nightmare

NPVAdvisor :

There's another theory that a decedent passing property at death, is probably not dying just to evade taxes, so mandating carryover basis, which would preserve the gain in the beneficiary, is unnecessary

NPVAdvisor :

There is no doubt that most estate planning attoryneys around the country all agree on one thing ... the best plan not to get killed in estate taxes is to give it away in those 14,000 pieces (no gift tax form required) year after year until there's no estate to tax (when you're at your deathbed and can't take it with you anyway) ... There are lots and lots of plans GRUTS, GRATS, Charitable remainder trusts, charitable lead trusts, wealth replacement trust in a life insurance trust woth Crummey powers... so that the money given to charity is replaced (tax free) for the heirs .... but the best plan?

NPVAdvisor :

Give it away in small piece, under that 14,000 radar screen, when the giftees probably need it most

NPVAdvisor :

Hope this helps

NPVAdvisor :

My own opinion is that once you are talking about decent sized estate... multiples of millions, why kill the heirs with a tax on the estate (estate taxes have to paid within 9 months of the date of death, you know ... so if that estate is mostly illiquid real estate, ... guess what ... the estate sale vultures are circling) the heirs DESERVE that step-up on whatever may be left

NPVAdvisor :

Let me know if you have questions

Customer: replied 3 years ago.
Customer: replied 3 years ago.
The majority of the students argued that the different treatment of gifts and inherited property made sense. This student is arguing it does not. First, I am unsure of what she is saying and I am wondering if her logic is accurate.
Customer: replied 3 years ago.
So, is her argument valid?
Customer: replied 3 years ago.
Most, including myself, felt that the fact the donee's basis in the property was the basis in the hands of the donor and the basis in inherited property was the FMV made sense because the estate of the decedent is taxed at the FMV.
Customer: replied 3 years ago.
I do not think I am in the right section for this Q & A session because I have to keep getting out and reentering this question.
Customer: replied 3 years ago.
i agree with what you are saying but that was not my question. What is the student trying to say and is her argument accurate?
Expert:  Lane replied 3 years ago.
I Completely agree with your argument.

Also remember that a gift isn't a transaction where something is exchanged for consideration (money or some other asset).

Also, she is kind of comparing apples and oranges. The estate tax is a transfer tax. The step up in basis only comes into effect when and if the heir eventually sells the asset.

So, again, the step-up basis has major advantages. It prevents double taxation of assets at death -- first by the capital gains tax and again by the estate tax.

Also, it greatly simplifies the settling of estates by executors. Under step-up, they need only calculate the value of assets at death, and don't need to know their original purchase price or any adjustments to it, such as depreciation.

The former, I believe is what the student is missing. If the estate is reduced by estate taxes and then the heir is punished again by having to sell assets that would have almost NO basis, that's double taxation (without the benefits that normally come with it, such as the finge benefit treatment received by C-Corps, which DO generate double taxation).

What ever the heck she' TRYING to say it doesn't hold water, MOSTLY because she's treating an eventual gain by an heir who sells the asset (possibly 50 years AFTER that death) and the estate tax (a whole different tax, with it's own rates and exemptions) as if they are the same tax.

Lane and other Tax Specialists are ready to help you
Customer: replied 3 years ago.
Thank you very much for your thorough answer. Additionally, thank you for confirming that I am on the right track.
Expert:  Lane replied 3 years ago.
Follow-up ... maybe this will help her think it through.

Taxes happen because of some taxable event.

For the capital gains tax, it' when an asset (the assets inherited by an heir in our discussion) are SOLD ... if they are sold at all.

For an income tax, it's the receipt of income.

For a transfer tax it's death.

If the asset was never gifted away it will be taxed at the estate level.

If it's sold, it will be taxed as a capital gain (either by the person who originally bought it or by the receiver of that asset as a gift)

It shouldn't be taxed twice

Lane and other Tax Specialists are ready to help you
Customer: replied 3 years ago.
Thanks again.
Expert:  Lane replied 3 years ago.
You're welcome

If you'd like to work with me again, just say "For Lane only." at the beginning of your next question.

Thanks again,