I have a Fidelity account (cash account, not IRA)and it has appreciated over the years - I am old now with no children and want to give this money to my niece, what is the best option so that she has the lowest tax she need to pay:
List my niece as the beneficiary on the account: when she inherits the account, she needs to pay the 15% long term capital gain that I had over the years ?
I do the cash out the account now, pay the 15% cap gain tax and give the cash to my niece: does she need to pay any gift tax ?
Also, look at revocable living trusts. Your niece may be able to avoid the capital gains that you have accrued. She might only have to pay the capital gains she accrues after you pass. I know thats how it works on a home from personal experience. Hope this helps…doc
If you let your niece inherit your shares, she gets them at stepped up basis. That means her basis of the shares is increased to their value on your date of death. Its the best deal around as she pays no income taxes on your gains.
Second best is gift her your shares. (Fidelity can transfer then directly to her account once you submit their paperwork and I show ID at their local office.) She gets your gifted shares with your cost basis. So she pays capital gains at her rate (which may be zero) but only when she sells.
Be aware of gift tax limits. This year you can give up to $18K to each individual without reporting it. If higher than that it gets reported on Form 709 with your income tax. Any gift over $18K gets deducted from your lifetime estate tax exemption. That is currently $13.61MM for individuals and $27.22 for married couples. If you a close to those numbers, you might want to consult a pro.
Selling shares and donating cash means you pay capital gains at your rate.
Note that in many states you can put a TOD (transfer on death) on your brokerage account. Then it can go to whoever you designate without going through probate–as long as you are below the estate tax exemption.
Make her a beneficiary on the account so she will get a step up in the basis as of your date of death.
If she needs some money now, you can cash out up to $18k, pay your capital gains taxes on it, and give her the money. As long as you keep your total gifted to her during 2024 at $18k or less, you won’t trigger any gift tax issues.
If you want/need to gift her more than $18k during 2024, then you will need to file a gift tax return f709.pdf (irs.gov) As long as the total in gift tax forms you have filed over your lifetime is less than the 2024 limit of $13.61MM, you won’t have to pay any gift taxes.
Please note: All of this is based on current tax law. There have been proposals to greatly limit or totally get rid of the step up provisions. Those proposals have not made it into law yet, but the expiration of the TCJA provisions at the end of 2025 gives Congress an incentive to pass a new tax law. Whether they can actually do so or not is always a question.
If a proposal limiting the step up provision does become law and you still want her to pay the least in taxes, then you should sell the assets, pay the capital gains taxes yourself, and leave her cash. If you would rather she pay some or all of the capital gains taxes, then be sure you leave her information on your cost basis for all of the assets.
Yes, paying capital gains on inherited shares (with a $1MM exemption) was discussed last time around but Congress didn’t have the votes to make it happen.
Because of stepped up basis, the savvy thing to do is pay taxes only on what you spend. Let everything else accumulate as capital gains for the benefit of your heirs. That does mean the money involved could be large (and the number of angry voters large too).
Not necessarily. If what you are spending is less than the 15% capital gain bracket plus your deductions (standard or itemized), then it can be useful to reset your basis using the 0% capital gains rate. In fact, you’d be silly not to do so.