Stepped up basis question

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
adam123
Posts: 114
Joined: Thu Jan 16, 2014 5:51 pm

Stepped up basis question

Post by adam123 »

I am maxing out my Roth and 401k, and am looking at opening an ordinary taxable account. One idea I had for tax efficiency was that instead of investing in my name, I could gift the money I was going to invest to a parent (14k or less a year), have the parent invest it in a taxable account, and then later inherit that account with stepped up basis. That would seem to have the effect of wiping out a lot of capital gains issues.

From a theoretical perspective, if you assume everything goes smoothly with this idea (and I assume this is the general criticism), am I right that I eliminate the capital gains that would otherwise exist if the account was in my name only?

Does anyone do this, or is it fraught with pitfalls that I am not taking into account?
placeholder
Posts: 4247
Joined: Tue Aug 06, 2013 12:43 pm

Re: Stepped up basis question

Post by placeholder »

The pitfalls are obvious the parents join a new religion and give the shares away or they get sick and all their assets go to the nursing facility or other ways that you end up not inheriting the shares.
johnny847
Posts: 423
Joined: Thu Apr 10, 2014 12:08 am

Re: Stepped up basis question

Post by johnny847 »

IF in fact everything goes smoothly - they don't mess with the contributions you made, they don't withdraw it, etc. then yes theoretically this should eliminate all the capital gains.

However, even if you do trust your parents to manage the account properly, things may not go to plan for reasons out of their control, and hence, is generally not advised. I have seen articles on how people's mental capacity diminishes as they age, and that affects their ability to continue to manage their portfolio properly. This is why SPIA's become more valuable the older a retiree gets.

What about tax loss harvesting? Would they be able/willing to do that and then pass on the tax savings to you? The tax savings probably wouldn't even be the same unless your parents' marginal tax rate is the same as your marginal tax rate, which seems unlikely since they're presumably retired or close to retirement, while you are not.

How about dividends? They would have to pay taxes on those. Would you pay them the taxes incurred from dividends from "your investments"?

Finally, it would make rebalancing your portfolio more difficult, as you'd have to keep track of the date and quantity of shares that you told your parent to invest in for all transactions, unless they give you their account password.

That's all the downsides I could think of, but there are probably more.
ajcp
Posts: 645
Joined: Fri Dec 13, 2013 6:44 pm

Re: Stepped up basis question

Post by ajcp »

I'm not an expert, so maybe I'm wrong here, but this sounds like tax evasion to me.
Retread
Posts: 703
Joined: Mon Apr 08, 2013 6:29 pm
Location: Southwest Florida

Re: Stepped up basis question

Post by Retread »

ajcp wrote:I'm not an expert, so maybe I'm wrong here, but this sounds like tax evasion to me.
It's not tax evasion, but it's an idea full of risk.
Bruce
absit iniuria verbis
User avatar
LadyGeek
Site Admin
Posts: 68701
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Stepped up basis question

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (Step-up in basis).

Never depend on an inheritance.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Boglegrappler
Posts: 1314
Joined: Wed Aug 01, 2012 9:24 am

Re: Stepped up basis question

Post by Boglegrappler »

I think it probably is workable and not challengeable if done correctly. Its hardly tax evasion if you give your property away to someone else with no certainty of ever getting in back. But escaping the (lowest rate) tax in the interim doesn't' seem worth the loss of control and the risk of it not working out or disqualifying your parents from taxpayer financial assistance should they need it.

Why not just invest the money yourself and hold it until you die, and then your kids will get the stepped up basis?
Alan S.
Posts: 10189
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Stepped up basis question

Post by Alan S. »

There is no tax provision prohibiting it, but there is one that prohibits something closely related. From p 42 of Pub 550:
Appreciated property you gave the decedent.
Your basis in certain appreciated property
that you inherited is the decedent's adjusted
basis in the property immediately before
death rather than its fair market value. This applies
to appreciated property that you or your
spouse gave the decedent as a gift during the
1-year period ending on the date of death. Appreciated
property is any property whose fair
market value on the day you gave it to the decedent
was more than its adjusted basis.
Under this provision if you owned shares that already have a large unrealized gain and you gifted those shares to someone who passed within one year of the gift, then if you inherited those same shares your basis would be your basis when gifted and there would be no basis adjustment at donee's death.
Post Reply