Is It Better to Gift or Inherit Money?

Deciding to transfer assets during your lifetime or as part of an estate involves navigating tax laws, personal financial security, and family dynamics. The optimal path depends on the nature of the assets, the financial situations of both the giver and receiver, and the ultimate goals of the transfer. The tax code treats gifting and inheriting very differently, creating scenarios where one is more advantageous than the other. Beyond taxes, personal and practical considerations also play an important role in shaping an effective estate plan.

The Tax Implications of Gifting

A gift is a transfer of property to another person for nothing, or less than full value, in return. This definition covers everything from cash to stocks and real estate. The donor, not the recipient, is responsible for paying any potential tax. However, most gifts do not result in a tax payment due to exemption amounts set by the Internal Revenue Service (IRS).

For 2025, the annual gift tax exclusion allows an individual to give up to $19,000 to any number of people without any tax consequences or filing requirements. A married couple can combine their exclusions to give up to $38,000 per recipient. For gifts exceeding this annual amount, the donor must file a gift tax return (Form 709) to report the excess, which then counts against their lifetime gift and estate tax exemption.

The lifetime exemption is a unified credit covering both gifts made during life and assets transferred at death. For 2025, this exemption is $13.99 million per individual. A person can give away up to this amount in taxable gifts (those over the annual exclusion) during their lifetime before any gift tax is due. This high exemption amount is scheduled to be cut roughly in half at the end of 2025 unless Congress acts to extend it.

A consequence for the recipient of a gift is the concept of “carryover basis.” The recipient’s tax basis in the gifted property is the same as the donor’s original basis—what the donor initially paid for the asset. This is particularly impactful for appreciated assets like stock or real estate. For example, if a parent gifts stock they purchased for $10,000 that is now worth $50,000, the recipient’s basis is $10,000. If the recipient later sells that stock for $60,000, they will owe capital gains tax on a $50,000 gain ($60,000 sale price – $10,000 carryover basis).

The Tax Implications of Inheritance

Inherited assets follow different tax rules governed by federal estate tax law. The estate tax is a tax on the transfer of a person’s assets after death and is paid by the decedent’s estate, not the individual heirs. Similar to the gift tax, a large exemption means very few estates pay this tax.

The federal estate tax uses the unified exemption established for lifetime gifts. An estate’s value is calculated by inventorying all the decedent’s assets, and if the total value is below the exemption amount, no federal estate tax is owed. For estates that exceed this threshold, a tax with rates up to 40% applies only to the value above the exemption. Some states also impose their own separate estate or inheritance taxes, which often have much lower exemption amounts.

The primary tax benefit of inheritance for appreciated assets is the “step-up in basis.” The tax basis of an inherited asset is adjusted, or “stepped up,” to its fair market value on the date of the original owner’s death. This provision can reduce or even eliminate the capital gains tax liability for the heir, as it erases the taxable gain that accumulated during the decedent’s lifetime.

To contrast with the gifting example, if the parent held the stock until their death when it was worth $50,000, the heir’s basis would be “stepped up” to $50,000. If the heir then sells the stock for $60,000, they would only owe capital gains tax on a $10,000 gain. This is a substantial tax savings compared to the $50,000 taxable gain in the gifting scenario.

Key Financial and Non-Tax Considerations

A primary motivation for gifting is the donor’s desire to see loved ones benefit from the wealth during their lifetime. This could mean helping a child with a down payment on a house, funding a grandchild’s education, or providing capital to start a business. For individuals with estates large enough to be subject to federal or state estate taxes, lifetime gifting can also be a strategy to reduce the size of their taxable estate.

A drawback for the donor is the loss of control and access to the gifted assets. Once a gift is made, it is irrevocable. Should the donor face unexpected financial hardship or medical expenses later in life, those funds are no longer available. Donors should ensure they retain more than enough assets to support their own lifestyle and potential future needs before embarking on a significant gifting strategy.

The type of asset being transferred is a factor in the decision-making process. For cash, the tax basis is not a concern. Therefore, the choice for gifting cash revolves more around the annual gift tax exclusion and the donor’s desire for immediate impact versus retaining the funds.

For appreciated assets like stocks, mutual funds, or real estate, the analysis changes. The competing tax rules of carryover basis for gifts and step-up in basis for inheritances come to the forefront. Gifting a highly appreciated asset can create a future tax liability for the recipient, whereas inheriting that same asset could wipe out decades of taxable gains. This makes holding onto appreciated assets until death a tax-reduction strategy for heirs.

Strategic Use of Trusts

Trusts offer control over wealth transfer, providing a middle ground between an outright gift and an inheritance. A trust is a legal arrangement where a grantor transfers assets to a trustee, who manages them for a beneficiary. This structure can be tailored to achieve specific financial and personal objectives that direct transfers cannot.

A primary function of a trust is to control how and when assets are distributed. Instead of a beneficiary receiving a large sum at once, a trust can stipulate that funds be distributed at certain ages, upon reaching milestones like graduating college, or as a steady stream of income. This can be useful for managing inheritances for young adults or beneficiaries who may not have the financial maturity to handle a large windfall.

From an estate planning perspective, certain types of trusts can be used to move assets out of a person’s taxable estate. By transferring assets into an irrevocable trust, the grantor gives up control and ownership, and those assets are generally no longer counted as part of their estate for tax purposes. This can be an effective way to use the lifetime gift tax exemption and reduce potential estate tax liability.

Trusts also offer asset protection. Assets held within a properly structured irrevocable trust are often shielded from the beneficiaries’ creditors, lawsuits, or claims from a divorce. This ensures that the wealth is preserved for its intended purpose. While the rules can be complex, trusts are a tool for those seeking more nuanced control over their legacy.