Income Tax

There are also federal income tax implications of estate planning. First, if property is income producing, the transfer of that property to an individual with a lower tax bracket may result in less income tax being paid. Second, the time of the gift may affect the capital gains tax that must be paid when the property is ultimately sold. There is a connection between the gift and estate tax and the federal income tax: tax basis, or the portion of the propertyâs value that the owner is allowed to recover without paying tax. The law provides that when a gift of appreciated property is made, the recipient takes over the giver's tax basis for income tax purposes. For example, if you give your son $200 worth of stock which you purchased some time ago for $100, your son's tax basis for measuring gain upon sale becomes $100. However, the law also provides that at death the income tax basis of assets is "stepped-up" to fair market value. In the same example, if you continue to own the stock until you die and the fair market value of the stock at death is $200, the tax basis to your son becomes $200, not $100.

Thus, in selecting assets for gifts, either during life or at death, you should consider the federal income tax consequences for the recipient in terms of tax basis and gain upon subsequent sale.