When it comes to passing down wealth to the next generation, many parents face the challenge of choosing the best strategy. Estate planning can feel overwhelming, with a wide variety of strategies available. But at the core, there are two common methods for transferring wealth: gifting and inheriting. While there is a whole world to explore for estate planning, we’ll break down these two strategies, the potential tax implications, and why it’s essential to make an informed decision when planning your estate. Let's dive in!

Gifting: Giving Assets While You’re Alive

Gifting is a simple strategy where you give assets to your beneficiaries while you’re still alive. It can include anything from cash to real estate to stocks. The gifting process is relatively straightforward, but you should know a few things before you start handing over assets.

What You Need to Know About Gifting:

• Annual Exclusion: In 2025, you can gift up to $19,000 per person without any gift tax implications. This means you can give this amount to as many people as you’d like without needing to file a gift tax return.
• Lifetime Exclusion: If you gift more than the annual exclusion amount, it eats into your lifetime estate exclusion. You can transfer this amount during your lifetime without paying estate taxes. As of 2025, this exclusion is quite large (just under $14 million per person), but keep in mind that this amount can change over time. It's also applied when you pass down assets via inheritance through your estate.
• Cost Basis: When you gift an asset, the recipient receives your cost basis (the amount you invested in the asset). For example, if you bought stock for $1,000 and it’s now worth $10,000, your recipient would take the $1,000 cost basis and would have to pay taxes on the $9,000 gain when they sell it.

While gifting can be an excellent way to transfer assets and see your loved ones benefit from your wealth, it does come with some limitations, especially if you plan on gifting significant amounts over time.

Inheriting: Passing Down Assets

Inheriting assets is the second primary strategy for passing down wealth, and it can often be a more tax-efficient method than gifting. When you pass away and leave assets to your beneficiaries, those assets are typically inherited rather than gifted. One of the significant advantages of inheriting is the step-up in basis.

What Happens with Inheriting:

When your dependents receive your assets, they will receive an adjusted amount at death. This adjustment comes from the cost basis they receive, which is increased to the fair market value and becomes their new cost basis. A lot, right? Here's an example to simplify that:

• Example: If you purchased stock for $1,000, and the stock is worth $10,000 when you pass away, your heirs will inherit the stock at the $10,000 cost basis, not the original $1,000. This means that they won’t owe taxes on the $9,000 in gains that accrued while you owned the stock.

However, it does not apply to tax-advantaged accounts, such as 401(k)s, IRAs, HSAs, etc. These accounts have rules and will be taxed based on your heirs’ tax situation at the time of withdrawal. Examples where this applies would include:

• Taxable brokerage accounts
• Real estate property
• Personal property
• Etc.

This is just like the gifting share the same lifetime estate exclusion amount, so as long as the amount is under the lifetime amount, estate planning taxes would not be applied (some of these taxes could be as high as 40% if over the amount).

[Note: Depending on your state, there may be an inheritance tax at the state level that's separate from the federal estate exclusion.]

Why Inheriting Is Beneficial:

For those with a significant asset gain, the step-up in basis can be a significant tax advantage. It allows your beneficiaries to inherit assets without the tax burden of the gains accumulated over the years, making it a powerful tool for wealth transfer.

Gifting vs. Inheriting

Choosing between gifting and inheriting depends on your individual financial situation, goals, and the type of assets you hold. Each method offers unique benefits and challenges:

• Gifting: Ideal for those looking to see their beneficiaries benefit now. However, if the assets have appreciated significantly, it could trigger taxes on any gains.
• Inheriting: The step-up in basis makes this a more tax-efficient strategy, especially for assets with substantial growth. It also allows you to leave a legacy without your beneficiaries facing significant capital gains taxes. However, this is more of a long-term strategy.

In general, inheriting assets can provide more tax advantages than gifting, especially when it comes to assets with significant appreciation. However, gifting may still make sense for smaller amounts or specific types of assets.

The Bottom Line

While gifting and inheriting are the two most common methods for passing down wealth, estate planning can get much more complex. Trusts, charitable giving, life insurance, and other strategies may also be relevant depending on your goals and estate size. But when it comes to the basics, understand how these two work. Let your beneficiaries keep as much as they can!

‍

Disclaimer

‍

‍