Estate Planning For Highly Appreciated Investments

Even if estate taxes aren’t the driving consideration for your (or your parents’) estate structure, there may still be some good opportunities for tax planning. Particularly around minimizing taxes on capital gains when giving assets to your kids.

Assets held in a taxable account, as opposed to a retirement account, often receive a step-up in cost basis at death. Where you would have once owed capital gains upon selling, you no longer do. This is because the new "basis" is calculated based on what the asset was worth at death. [This is usually true for "most" people, but exceptions do exist.]

For most people, this merits some planning.

One way people waste this opportunity is by giving those highly appreciated investments to their kids during their lifetime. This sticks your kids with the capital gains tax. But if your kids inherit those investments, they often will not owe capital gains taxes.

Now, there are plenty of reasons to give money to your kids. But from a tax standpoint, you'll want to be thoughtful about which assets you use.

If you are going to make lifetime gifts, cash and assets with smaller gains are generally better candidates than assets with large gains (or assets that you think will appreciate significantly during your lifetime).

Conversely, highly appreciated stocks, funds, and real estate may be more valuable to keep in the estate until death. If you bought shares of Microsoft or Apple back in 2005, those are probably not the first shares you should be giving to your kids.

To summarize, for many relatively simple estates, one of the most valuable tax-planning tools is the step-up in basis at death. It doesn't require sophisticated trusts, it is accessible to anyone with a taxable investment. And so it's worth understanding the tax implications so that you don't waste the opportunity. 

Disclaimer: I'm oversimplifying here to highlight a single consideration, albeit an important one. When you factor in things like estate taxes, trusts, and how long the donor and recipient are likely to hold the asset, the analysis can change.