MW My mother-in-law, 95, has $400K in stocks. Would it be smarter taxwise to gift it to her kids - or leave it to them in her will?

By Quentin Fottrell

'What is the smartest way to go about this? Will she be taxed?'

Dear Quentin,

My wife and I live in New Hampshire and her mother, 95, lives with us. Mom has an Edward Jones account with $400,000 of Union Pacific's stocks. She, mom, wants to divide this $400,000 and give it now to her four kids, basically $100,000 each.

Can she do this? What is the smartest way to go about this? Will she be taxed? Will the recipients be taxed? What surprises await if she does this?

Son-in-Law

Related: 'This flies in the face of my morals and ethics': My father cut my sisters out of his six-figure estate. Should I push back?

Dear Son-in-Law,

Your mother-in-law has waited this long. She should hold onto the stock.

Patience is a virtue - and, under the right circumstances - also bestows a big tax advantage. Your mother, given her age and the tax benefits of waiting, would do well to wait before leaving this stock to her four children. I understand why she would like to do so now. She gets the pleasure of gifting this stock and, perhaps, one or more of her children could sell this stock and use it for renovations on their home or, indeed, a downpayment on a home. But the tax benefits would likely far outweigh the immediate gratification.

Your mother-in-law's heirs will avoid having to pay a hefty capital-gains tax if they inherit this stock, meaning the $100,000 in stock will be taxed by the Internal Revenue Service for each recipient at the market value upon your mother-in-law's death - and not at the price she bought them at. So, let's say she purchased this stock in 1985 for $4 (not accounting for various stock splits for simplicity's sake) and it was worth its current value at $245 when she passed away, your wife and her three siblings would pay taxes on the $245, not $4.

If your mother-in-law holds onto the stocks, at the date of her death or six months later, the stock can receive a step-up basis, and the beneficiaries may actually realize zero capital gains taxes, depending on the price, says Miklos Ringbauer, a Los Angeles-based CPA. "Beneficiaries would be able to also hold onto the stock and may receive additional appreciation from the step-up basis which would be subject to capital gains taxes if sold at a profit." Word of warning: The stocks can be gifted, but the basis and holding period will transfer to the recipient.

If your mother-in-law holds onto the stocks, at the date of her death or six months later, the stock can receive a step-up basis.

People generally look at an appreciating asset and weigh up the pros and cons of gifting it now rather than waiting. "In most cases, transferring such assets to a family member or charity allows you to avoid paying capital gains taxes on the appreciation," says Charles Schwab. That's zero, 5% or 20%, depending on your income, plus an additional 3.8% net-investment income tax if your income exceeds certain thresholds. "Furthermore, gifting these assets removes any future appreciation from your estate," it adds.

"However, unlike assets passed down after death, assets that are gifted carry over your original purchase price (carry-over basis) and holding period," Charles Schwab $(SCHW)$ says. "If and when your heirs decide to sell the stock, they will incur capital gains on the appreciation from the date of your purchase to the date of their sale. That said, the inheritor's taxes may be lower than yours if they're in a lower tax bracket, so this option might be worth considering if, say, the gift is for a new graduate or other lower-income family member."

A grantor retained annuity trust (GRAT) is another way of removing future appreciation from your estate while passing assets to your beneficiaries tax-efficiently, Charles Schwab adds. "They are often used for gifts to children but not grandchildren because GRATs are not necessarily exempt from generation skipping taxes. Under this strategy, you transfer highly appreciating assets into a fixed-term, irrevocable trust, which then pays you annuity payments plus a rate of return (as determined by the IRS) for a set number of years."

If there is any excess appreciation at the end of that time - if the investment return of the GRAT is greater than the IRS assumed rate of return - that excess passes to your beneficiaries tax-free. The gift may not count against your lifetime gift and estate-tax exemption, and your wife and her siblings will get their step-up in basis. The annual gift tax exclusion amount is $19,000 per recipient (or $38,000 if you are married) for 2025 without having to file a tax return for the gift. The IRS also allows a person to give away up to $13.99 million in their lifetime.

I hope this is helpful for your wife and her three siblings - and for anyone else who may be at risk of making this all-too-easy estate-planning mistake.

Related: 'My wife and I are very grateful': Our son wants to pay off our mortgage before we retire. Will this backfire?

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. Check out the Moneyist private Facebook group, where we look for answers to life's thorniest money issues. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

The Moneyist regrets he cannot reply to questions individually.

Previous columns by Quentin Fottrell:

Will my second wife be able to access my money if I transfer it to my retirement account?

'Is this ethical?' I want to leave my home to my children from my first marriage - and not to my second husband.

'We have no prenuptial agreement': Will my wife be able to take my money if I transfer it to my retirement account?

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-Quentin Fottrell

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June 16, 2025 06:30 ET (10:30 GMT)

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