Your Estate – Gift It or Leave It? The Tax Cost of Giving Assets to Your Children

Giving your children appreciated stock or real estate today can pass along a future tax bill. Leaving those same assets to them at death may produce a very different result. The difference comes down to tax basis, and the issue is relevant even if your family will never owe federal estate tax.

In 2026, the federal estate and gift tax exemption is $15 million per individual, before accounting for prior taxable gifts. This is one shared exemption: taxable gifts you make during your lifetime and transfers at death both use it, rather than each receiving a separate allowance. Under the One Big Beautiful Bill Act enacted in July 2025, the amount is adjusted for inflation after 2026 and has no scheduled expiration, although future legislation could change it. For families unlikely to owe federal estate tax, deciding which assets to give and which to keep can make a meaningful difference in what beneficiaries ultimately retain.

What Is Tax Basis and Why Does It Matter?

Tax basis generally represents an individual’s investment in an asset, typically its original purchase price adjusted for certain items such as improvements or depreciation.
When an asset is sold, the difference between its sales proceeds and adjusted tax basis generally determines the taxable gain or loss.

The rules for determining tax basis differ significantly depending on whether an asset is received as a lifetime gift or inherited at death.

How Much Difference Can Basis Make?

Consider a parent who purchased stock many years ago for $100,000. The stock is now worth $500,000. Here is how the child’s tax result compares if the parent gives the stock during a taxpayer’s lifetime or leaves it to the child at death.

	Lifetime Gift	Inheritance at Death
Parent's original cost (basis)	$100,000	$100,000
Stock value at gift or at death	$500,000	$500,000
Child's basis	$100,000	$500,000
Child sells stock for	$500,000	$500,000
Child's capital gain	$400,000	$0

This example assumes no gift tax was paid on the gift, no other basis adjustments or selling costs, and that the child sells the inherited stock for its date-of-death value. The difference could mean substantial federal and state income tax savings, depending on the beneficiary’s tax situation.

Lifetime Gifts: Carryover Basis

When an individual gifts appreciated property, such as stocks or real estate, the recipient generally assumes the donor’s adjusted tax basis. This is commonly referred to as “carryover basis.”

As a result, the recipient takes on the built-in appreciation and the corresponding capital gains tax exposure. For example, putting your child on title of your home may simplify your estate plan but can cause a future unexpected tax bill for your child.

In 2026, the annual gift tax exclusion is $19,000 per recipient for qualifying gifts. This amount is not a limit on how much an individual can give. Gifts exceeding the annual exclusion may require reporting to the Internal Revenue Service and possibly payment of gift tax.

Inherited Assets: Step-Up in Basis

In contrast, assets inherited from a decedent generally receive a basis adjustment to their fair market value as of the date of death. This is commonly referred to as a “step-up in basis”, although the adjustment can also result in a lower basis when an asset has declined in value. This basis adjustment generally applies even when no federal estate tax is owed. For married couples in community property states such as California, both halves of community property generally receive a basis adjustment at the first spouse’s death, not just the decedent’s half. Assets held in joint tenancy generally receive an adjustment only on the decedent’s share, so how assets are titled can matter.

This adjustment can significantly reduce or eliminate the capital gains tax attributable to appreciation during the decedent’s lifetime.

Does This Mean You Should Avoid Lifetime Gifts?

Not necessarily.

Lifetime gifting remains an important estate planning strategy, particularly for individuals with taxable estates. A completed gift, where you do not keep rights or control that would pull the asset back into your estate, can remove future appreciation from your taxable estate and reduce estate tax exposure.

However, for individuals whose estates are unlikely to exceed the federal estate tax exemption, retaining highly appreciated assets until death may provide a more favorable overall income tax result for the beneficiaries.

The gifting decision should consider several factors:

• The current fair market value and adjusted basis of the assets
• The donor’s potential federal and state estate tax exposure (California has no estate or gift tax, but some states do)
• The anticipated future appreciation of the assets
• The income tax consequences to the beneficiaries
• The donor’s financial needs and overall estate planning objectives

For example, gifting cash or assets with a tax basis close to their fair market value may be more advantageous than gifting highly appreciated assets. The appropriate strategy depends on the individual’s overall tax and estate planning goals.

Do Assets Held in Trust Receive a Step-Up in Basis?

Assets held in a revocable living trust generally receive the same basis adjustment as qualifying assets held directly.

Whether assets in an irrevocable trust receive a step-up in basis at death depends on one key question: are the assets included in the grantor’s gross estate for federal estate tax purposes? If they are, the assets generally receive a step-up to fair market value. If they are not, the assets keep the grantor’s original “carryover basis”.

Not Every Asset Receives a Basis Adjustment

Distributions from traditional IRA or 401(k) accounts that would have been taxable if received by the decedent generally remain taxable when these accounts are inherited and distributions are received by beneficiaries. Retirement accounts do not receive the basis adjustment described above. The same is generally true of other income the decedent earned but had not received before death.

Planning Beyond the Estate Tax Exemption

Effective estate planning involves more than minimizing estate taxes. A strategy that reduces estate tax exposure may create unintended income tax consequences for beneficiaries.
With the current higher federal gifting/estate tax exemption, now may be an appropriate time to revisit existing gifting strategies and review the tax basis of assets held individually or in trusts.
Before transferring appreciated assets, consult your Abbott, Stringham & Lynch advisor to evaluate which assets to give, which to retain and how these decisions fit within your overall estate plan. Abbott, Stringham & Lynch can coordinate with your estate planning attorney to help develop a tax-efficient wealth transfer strategy.

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