You are assuming that the recipients of your gifts will not also invest them just as well as you would’ve if you’d kept them.
And besides, most of the tax-reduction achieved by giving gifts instead of leaving an estate is accomplished in that final BIG gift you make to your heirs just before you die, not in the little $10,000 gifts you give to them each year beforehand.
But I know what you’re thinkin’. “What if I die unexpectedly, before I had a chance to give my stuff to my kiddies?” Well, one way around this is to put your assets into a revocable living trust, with your kids as beneficiaries, and add a clause in the trust that makes it irrevocable one minute before you die. Then it counts as a gift made during your lifetime, rather than an estate transferred after you die. … Well, okay, this strategy used to work, but the tax courts may have closed this loophole.
It’s called “stepped up basis”. When an individual dies, the cost basis of capital assets is reset to the value on the date of death. So, only changes in value after death are subject to capital gains (or loss–if a stock you inherit drops in value after the death of the person willed it to you, and you sell it, you could take a loss against other gains or against regular income). Note that this only applies to assets that would normally be subject to capital gains tax, not to tax-deferred retirement plans (like IRAs and 401(k)s). I know about this after long discussions with my mother-in-law (an accountant) about the hassles of dealing with her mother’s estate.
The upshot appears to be that the retirement accounts count against the estate and the income is taxed when the beneficiary withdraws the money, but there is some offsetting deduction for the estate taxes that were paid.
What line in form 1040 is this offsetting deduction on? Can I take it against any taxed estate I’ve inherited, or can I only take it against IRAs/401(k)s I’ve inherited?
Thanks for the info, tracer. Trouble is, my wife and I are saving our money for us. We’ve been married 17 years, and have a three-year-old and another on the way. We’ve been saving every extra cent since we married (when we were 22), forgoing things that others would have splurged on. We’ve managed to save up a nice nest egg, and I prefer to spend it all during our retirement (if we had more than we could spend ourselves, we would retire now). But we’ve already paid taxes on our savings (except some capital gains that have not yet been taxed), and it really bothers me that if we were both to die, Uncle Sam would get a nice little windfall. I would want the money to go to people in our families, including enough to raise our kids.
Giving our money away to others is not an option at this point. And the IRS has already claimed a very significant portion of our wealth - it makes me mad to think that they would get more if we died.