Generational Transfers – Does It Matter When You Transfer An Asset To The Next Generation?
The simple answer is “yes” – but the better question is “why does it matter when you transfer an asset to the next generation?”
At a basic level, there are two ways to accomplish a generational transfer. You can transfer an asset while you are living (gifting it to the next generation) or you can transfer it through your estate planning (giving it as an inheritance to the next generation).
In deciding which way to transfer an asset, two questions that you have to answer are the following: (1) Do you need to maintain some level of control over the asset that you are transferring? And (2) What are the tax ramifications when you transfer the asset?
Who controls the asset?
On the first question, if you make a gift of an asset during your life then you no longer own or control the asset. This may be the objective, but it can also be problematic in certain circumstances. For example, if you gift land to a child through a deed transfer, and you have a future disagreement with the child, you cannot take back the land. The child is the owner of the land, and can choose to do as the child deem prudent without any input from you. Additionally, because the child now owns the land, it is subject to the creditors and debts of the child. Based on these considerations, there are advantages to making gifts to the next generation through a Trust that leaves control of the property in your possession, and helps to protect the property from creditors and debts.
Tax ramifications for gifts
On the second question, if you make a gift during your lifetime, then the receiver of the gift retains your basis in the asset, and will potentially owe increased capital gains tax on the asset if and when it is sold. For example, if you purchased a piece of land for $10,000, and subsequently gift it to your child during your life through a deed transfer, and you child later sells the land for $30,000, then your child will have a gain of $20,000 on the land, which will be subject to capital gains tax. On the other hand, if you keep the land in your name, and transfer it at your death to your child who then sells it for $30,000, then your child gets a step-up in the basis to the date of death value, and may not have to pay any capital gains tax.
Wise choices when transferring wealth
Both of these questions and considerations are more complex than can be explained in this short article, and there are other considerations that should be addressed as well before making generational transfers. Involving an attorney to help you consider all of the issue is always prudent, and can provide you the information that you need to avoid making an unwise decision.