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Law Offices of Ronald W. Rutz
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November 14, 2000: Gifting Appreciated vs. Depreciated Assets; Estate Taxes and Planning; Election

Q: Both of our financial advisors have told us to gift appreciated property but you seemed to have suggested otherwise to some of your clients. Why?

A: It is always wise to consider a contrarian viewpoint. If you sold an appreciated asset, of course you would have to report as income the difference between the asset sales proceeds minus what you paid for it (basis). However, if you owned the asset long enough, the tax rate would not be your ordinary income tax rate, but the capital gains tax rate.

If you gift property, the receiver "steps into your shoes" taking over your basis, so when selling the asset, he or she will more than likely pay the same amount of capital gains tax as you would pay.

Each person can give away a bit more than $10,000 per person (no limit on the number of $10,000 recipients) each calendar year. But let's assume the capital gains rate is 20%, then for illustration purposes if your basis was zero, you only gave a net of $8,000, not $10,000, if you consider the built-in tax liability. So you did not give away as much as you were allowed.

If you do not intend to sell an asset that has appreciated in value and it is owned when you pass away, there should be no estate tax (if you did your planning) and the recipient gets a stepped-up basis so the new basis is the date-of-death value (in the above example, $10,000).

Thus, if the asset is sold by the beneficiary for $10,000, there is no gain. (The thought is that the government had a chance to tax it in the estate, so for income tax purposes, the government should not get a second chance.)

Just remember the old chestnut that it is better to inherit an appreciated asset and receive the new basis (which is the value at the date of death) than it is to receive it as a gift and be stuck with the giver's basis.

Consider gifting a depreciated asset (especially if you feel it will bounce back). Thus, your gift will be the full $10,000 plus the "bounce back" appreciation. Also consider gifting a non-appreciated asset such as cash. Remember there is no right or wrong answer for everyone but all alternatives need to be considered.

Q: I thought you said no farmer or rancher would have to pay estate taxes but there are several stories in the Denver Post showing this poor ranch family being devastated by taxes.

A: The headline is very disturbing and the story is very sympathetic, but as far as I am concerned, one little sentence in the middle of the newspaper account tells the story. The deceased did not do any planning.

I believe that the ranch sold for about $8,000,000. If a total of about $1,500 was spent on wills (the story was not clear if there was a surviving wife) and a limited liability company, the exposure would have been significantly reduced, and with just a little fine tuning, taxes would have been eliminated, at least in my opinion from the facts I read.

But this is a free country so people make their own decisions for both estate planning and also in this case for business planning. Even if estate taxes were not an issue, wills plus the LLC would probably still have been very important from just a personal and business perspective and would have cost about the same.

Thus, you can focus on the result (taxes) but if you ignore what led up to what happened and the reasonableness of the choices, then the overall impact of the newspaper article may not be that useful in helping form an opinion, unless a purely emotional conclusion was the goal.

Q: Why can I not get anyone to listen to me? The Twelfth Amendment clearly states "The Electors shall meet in their respective states and vote by ballot for President and Vice-President, one of whom, at least, shall not be an inhabitant of the same state with themselves…" So Texas members of the electoral college can not vote for the Bush-Cheney Team!!

A: It has been a while since I taught any Constitutional law, so I called several people in each party to be sure I remembered this point correctly.

You assume inhabitant means a physical residence, while the term generally has been interpreted to mean a legal inhabitant, at least as far as this Amendment is concerned. Cheney, among other things, by reregistering to vote in Casper, Wyoming, has satisfied officials in each party to whom I spoke that the terms of the 12th Amendment have been met, although he continues to live in Texas.

One of the chief purposes of a Court is to construe terminology in light of its context. In this matter, whether the Courts or tradition got it right is beside the point. That is what the word "inhabitant" is deemed to mean, even if it is defined differently in the dictionary.

In a different setting, the word "inhabitant" could be found to mean physical residence but here it is necessary to explore beyond what was written and learn what was really meant.

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