Gift it now or let them inherit it?
The question is always "Should I gift this now or let them inherit it?" The instinct says gifting saves tax. Below the exemption that instinct can run backward. The tax difference is not in transfer — it is in what happens when your children sell.
The two ways to transfer
You can give property during life or you can leave it at death. Both move the asset. Neither triggers income tax at the moment of transfer. The recipient does not pay income tax on receiving a gift, and an heir does not pay income tax on receiving an inheritance. So far identical.
The difference surfaces later, when the recipient sells. The tax on that sale turns on a single number: basis. Basis is what the tax code treats as the recipient's cost in the property, and the gain they owe tax on is the sale price minus that basis. How the property arrived — by gift or by inheritance — decides what that basis is.
A gift carries carryover basis under Section 1015 of the Internal Revenue Code. The recipient steps into the donor's shoes. If you bought stock for $100,000 and gift it when it is worth $500,000, the recipient's basis remains $100,000. When they sell for $500,000 they owe tax on a $400,000 gain.
An inheritance receives a basis step-up under Section 1014. The heir's basis becomes the fair market value on the date of death. You bought the same stock for $100,000. It is worth $500,000 when you die. Your heir's basis is $500,000. They sell the next day for $500,000 and the gain is zero.
That $400,000 spread is the entire analysis for most families. Gift it and the appreciation since your original purchase will be taxed when your children sell. Let them inherit it and that appreciation disappears.
When does the gift tax apply?
The federal gift tax becomes a consideration only when lifetime transfers exceed the exemption. The exemption amount is adjusted annually for inflation. A married couple can effectively double that threshold through appropriate planning before the gift tax applies to a dollar of it.
Gifts within the annual exclusion do not count against the lifetime exemption. The annual exclusion under Section 2503(b) is adjusted for inflation and published by the IRS each year. You can give up to that amount to each of your children, to each of their spouses, to each grandchild, every year, and none of it reduces your lifetime exemption or triggers a filing requirement. A couple can effectively double that per recipient annually through appropriate gift-splitting.
Gifts above the annual exclusion require filing Form 709, but filing a return is not the same as paying tax. The return reports the gift and reduces your remaining lifetime exemption by the amount over the annual exclusion. The tax itself is not due until cumulative lifetime gifts exceed the full exemption.
For a family whose total wealth sits well below the current exemption threshold, the gift tax is not the constraint. The question is basis, and on that question the gift loses.
What happens at the 2026 sunset?
The current exemption is temporary. The Tax Cuts and Jobs Act doubled the exemption in 2017 and indexed it to inflation. That provision sunsets on 31 December 2025. Without legislative action the exemption appears to revert to its pre-2018 level, adjusted for inflation — estimated at approximately $7 million per person for 2026.
The approaching sunset has prompted considerable attention to large lifetime gifts. A donor who transfers a substantial amount in 2025 uses the exemption available that year. Our reading of the Treasury regulations published in 2019 is that if the exemption later falls, a gift made when the exemption was higher remains fully exempt. The estate is not retroactively taxed on the difference. The IRS confirmed in 2019 that gifts made under the higher exemption will not be adversely impacted when the exemption drops.
This matters for families whose wealth exceeds even the lower exemption. If your estate will be $20 million and the exemption drops to $7 million, a large gift in 2025 removes that property from your taxable estate and uses an exemption that will not be available next year. The gift incurs no tax, the transferred amount is out of your estate, and the remaining estate may fall within the post-sunset exemption.
But the gift still carries carryover basis. Your heir receives the property with your basis in it, and the appreciation since your purchase will be taxed when they sell. The estate tax saved by the gift has to be weighed against the capital gains tax your heir will pay later.
Below the exemption the calculation reverses
Where total wealth sits comfortably below the exemption — whether the current indexed amount or the post-sunset threshold — the estate tax is not a risk either way. No gift tax applies and no estate tax applies. The transfer itself is tax-free in both directions.
In that case the only tax in the picture is the capital gains tax your children will pay when they sell, and that tax is lower if they inherit. The step-up eliminates the tax on everything that appreciated during your life. The gift preserves it.
Take property you bought for $200,000, now worth $1 million. Gift it today and your child's basis is $200,000. They sell next year and owe federal capital gains tax on $800,000 — at current rates that is $190,400 if they are in the top bracket, plus state tax where applicable. Let them inherit it and their basis is $1 million. They sell the next day and the gain is zero.
The $190,400 is the cost of gifting rather than waiting. That cost is certain. The estate tax saved is zero, because your estate was never going to owe it.
Does holding the property create estate tax risk?
The concern sometimes raised is that property retained until death pushes the estate over the exemption if it appreciates enough. In principle that is possible. In practice the exemption is high enough and the marginal estate tax rate steep enough that the math rarely supports accelerating a gift to avoid it.
Assume you hold $5 million in assets today, the exemption drops to $7 million in 2026, and you are considering whether to gift a $1 million property to keep future appreciation out of your estate. If that property doubles to $2 million by the time you die and your other assets remain flat, your estate is $6 million — still under the $7 million exemption. No estate tax is owed.
For the property's appreciation to create estate tax, your total estate would need to exceed $7 million. Even then the estate tax applies only to the amount over the exemption, at a top federal rate that appears to be 40 percent after the sunset. Compare that to the capital gains tax your heir avoids through the step-up — up to 23.8 percent federal on the built-in gain if the property is gifted, or zero if inherited. The estate tax risk has to be both certain and large to justify giving up the step-up.
The situation that genuinely calls for lifetime gifting is one where the estate will exceed the exemption by a substantial margin and the donor has low-basis property they can afford to part with. That describes a narrow set of families. For everyone else the step-up is worth waiting for.
What about the annual exclusion?
Annual exclusion gifts remain useful for reasons unrelated to tax. Transferring the annual exclusion amount per recipient per year moves wealth out of your estate without a filing requirement, and if your goal is to see your children use the money during your life or to fund a grandchild's education, the transfer accomplishes that. The amount is small enough that the basis cost is modest in absolute terms.
But the annual exclusion does not change the basis rule. A gift of stock within the annual exclusion amount, where you bought that stock for substantially less, still gives the recipient your original low basis. They will owe tax on the appreciation when they sell. If they had inherited the same stock they would have a stepped-up basis and no gain. The exclusion makes the transfer simple. It does not make it tax-efficient.
When does gifting make sense?
Gifting saves tax where the estate tax exceeds the capital gains tax given up. That typically requires three conditions. First, the estate must be large enough that it will owe estate tax even after the lifetime exemption. Second, the property gifted must be high-basis or appreciating from a recent purchase, so the capital gains tax foregone through loss of the step-up is small. Third, the donor must be able to part with the property and does not need the income or liquidity it represents.
Example: You hold $20 million in assets, the exemption will be $7 million, and you recently sold a business and reinvested $5 million of the proceeds in a diversified portfolio. Your basis in that portfolio is close to its current value, so there is little built-in gain. Gifting the $5 million in 2025 removes it from your estate, uses exemption that is about to disappear, and costs your children almost nothing in foregone step-up because the basis is already high.
The same analysis does not hold for low-basis property you have held for decades. A $5 million gift of stock you bought for $500,000 saves estate tax on $5 million but costs your heir the step-up on $4.5 million of appreciation. At a 40 percent estate tax rate the estate saves $2 million. At a 23.8 percent capital gains rate your heir pays $1.07 million they would not have owed. The gift is still a net benefit, but the margin is narrower than it appears, and that is before accounting for state estate or income tax.
The basis cost is invisible until sale
Carryover basis does not announce itself. The gift is received, the property sits in your child's brokerage account or in their name on a deed, and nothing on the statement says the tax is waiting. The cost surfaces years later when they sell, often after you are gone and the opportunity to structure it differently has passed.
By then the original purchase price may be hard to reconstruct, the records may be incomplete, and the built-in gain may be larger than anyone expected. IRS Publication 551 appears to place the burden of proving basis on the taxpayer. If the donee cannot document your original basis, the IRS may treat it as zero, and the entire sale price becomes taxable gain.
An inheritance, by contrast, establishes basis at a known date — the date of death — and the fair market value on that date is generally susceptible to proof even years later. The step-up is clean and the record is clear.
Bottom line
For most families the basis step-up at death is worth more than any estate tax saved by a lifetime gift. The step-up eliminates income tax on decades of appreciation. That benefit is lost the moment you make the gift, and it does not come back. Where an estate falls below the exemption — and after 2025 that still appears to mean approximately $7 million per person — the estate tax is not a factor either way, and the only tax in the analysis is the one your children pay when they sell. On that margin the inheritance wins.
Lifetime gifting makes sense where the estate will substantially exceed the exemption, where the property gifted has high basis or is appreciating from a recent purchase, and where the donor can afford to part with it. That is a specific picture. It is not the general case.
The question of whether to gift or let someone inherit is not one an article answers. It depends on the size of your estate, the basis in the property, your liquidity needs, what the exemption will actually be when the time comes, and what your state's rules are. These are questions for your estate attorney and your CPA, working from your actual documents and your actual numbers. Written to the law as it stood in February 2025.