If you recall from our post earlier this year, New York State Budget Revives Gifting "Claw back," individuals can pass away with over $11.4 million worth of assets federally. The benefits of passing assets through the estate process, mainly the stepped-up tax basis, were also outlined in that post. This led some astute observers to ask about deathbed transfers, which is the topic of this post.
Suppose for instance that a grandparent was terminally ill. Spouse A (who is married to spouse B and grandchild of the terminally ill grandparent) owns $5 million worth of assets with an adjusted tax basis of $1 million (i.e. assets’ purchase cost minus any depreciation). Spouse A decides to gift the assets to the terminally ill grandparent with the intent that they be left to Spouse B in grandparent’s will. This plan assumes that grandparent does not have an estate tax issue.
All other potential non-tax considerations aside (i.e. creditors and business reasons), if grandparent were to die within one year of the gift, the rules prevent a step up in basis. In other words, the tax law has contemplated these types of scenarios and tried to mitigate it. In the example above, $1 million (i.e. the carry-over basis) would be Spouse B’s basis.
On the other hand, if grandparent lived over a year and then passed the assets to Spouse B, there would be a stepped-up basis. Alternatively, if Spouse A and Spouse B had children and grandparent left the assets to them, that would also mitigate the one year rule that precludes stepped-up basis.
As the example illustrates, deathbed planning might not be the best option. Furthermore, it might not make a lot of business sense to make such gifts given the potential risks involved. However, it does capture the general sentiment that individuals should be looking for ways to inherit assets versus receiving them as gifts during their lifetime.