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Property owners have several decisions to make during the estate planning process. One of those is whether to give property to family members before or after death. Montana State University Extension has a Mont Guide that gives information about how to approach that choice.

According to Dr. Marsha Goetting, MSU Extension family economics specialist Montana, a person should consider the income tax consequences of the timing of gifts to family members.

Montana ended the state inheritance tax in 2001. Now the federal estate tax only affects individuals with estate values at more than $13,990,000 or married couples with more than $27,980,000.

When an individual sells property, not all of the proceeds are taxable, shared Goetting. She added when income is calculated, a person is only taxed on the difference between their “basis” in the property and its sale price. As a general rule, basis is the amount paid to buy an asset, like a house, car, equipment or stocks. The basis of some assets, such as equipment in a business, can depreciate. When this type of an asset sells, the tax liability is calculated based on the sale price received minus the depreciated basis.

In deciding whether to make a gift before death or in a will, revocable trust or testamentary trust, an individual should understand the difference between a “stepped-up” basis and a “carry-over” basis.

An example is a widow who is trying to decide if she should gift her home while she is alive to her daughter or leave it to her after death. She and her late husband bought the home 40 years ago for $45,000, and now its value has increased to $550,000. While there are personal considerations for one choice over the other, understanding the difference between a steppedup and carry-over basis may influence the decision.

If the widow leaves her home to her daughter in her will, transfer on death deed, or a trust, the basis in the home “steps up” from the $45,000 she and her husband paid to buy it, to the value upon her death of $550,000. It’s not the method of leaving the property that causes the step up in basis, it’s the fact the owner died.

The stepped-up basis eliminates the daughter’s income tax liability on appreciation in the property’s value that occurred during the mother’s lifetime. In other words, if the daughter sells the house soon after her mother’s death for $550,000, the fair market value at the date of her mother’s death, she has no income tax liability. If she sells the house a year later for $560,000, the daughter will only pay a state and federal in income tax on the $10,000 capital gain in value that occurred between her mother’s death and the sale.

Property transferred as a gift before death has a carry- over basis, meaning the original cost basis of the house, less any depreciation, carries over to the daughter, Goetting said. Because the home was not used in a business, the widow’s original basis of $45,000 was not depreciated, the daughter’s basis in the house is $45,000. If the daughter sells the house for $550,000, she will pay state and federal taxes on the appreciation, called capital gain or increase that occurred in the property’s value during her mother’s lifetime ($505,000). If the daughter is in the highest income tax bracket, she could pay federal and state income taxes in excess of $144,935.

If an estate value falls under the current $13,990,000 limit and parents want to make a large gift to their children, choosing a stepped-up basis with a gift at death lowers the impact of state and federal income taxes and the beneficiary receives the most value from the asset.

People have worked hard for their property and should look at all the possibilities before making a final decision on whether to make a gift before death or at the time of death and take advantage of the current tax rules, Goetting emphasized. If you are contemplating a significant gift, consult your accountant or attorney for an analysis of the tax or other legal consequences you should consider.”

More information can be found in the Mont Guide “Income Tax Impact When Selling, Gifting, or Leaving Property as an Inheritance at store.msuextension.org/Publications/ FamilyFinancial-Management/MT202202HR. pdf. Printed copies are also available from county or reservation Extension offices.