If you are going to make gifts to your children, the choice of gifts is critical. A major consideration is the tax basis of the gift.
Basis is a tax term meaning your tax cost. If you buy stock for one hundred dollars, your basis in that stock is one hundred dollars. If you, or the person to whom you give the stock, sells it for more, any excess over one hundred dollars will be taxed. The tax basis in the hands of a donee is the same as it was in the hands of the donor - it does not increase when the asset is given away.
If you leave a gift to someone on your death, the tax basis "steps up" to the value at the date of death. If the stock you bought for one hundred dollars is worth five hundred dollars, the recipient's basis is five hundred dollars. This step-up in basis occurs even if no tax return has to be filed and no estate tax has to be paid in your estate.
If you are going to make a gift to a child, take a close look at the basis. If something has a low basis, perhaps you should leave it in your estate so as to save income taxes if the child sells the asset.
If your estate is large enough so that, even with effective estate planning, an estate tax will be payable, you might want to give away assets which have been devalued in the recent stock market dip. Assets given away during life are subject to gift taxes on the market value at the time of the gift, and if the value of the assets has decreased, you will save gift taxes - more about that in next week's Notes.
The stock market will recover - the question is how long it will take. I talked with a client who is an aggressive investor and asked how he was sleeping, having in made the gyrations of the market. "Like a baby", he replied. "How is that?" I asked. His answer was, "I sleep for an hour, then wake up and cry for an hour, then sleep for an hour...."
