A listener wrote in about her 88 year old mother, sharp as ever, who has about $6 million in a brokerage account loaded with decades of embedded gains, plus a house she’s owned since the early 1970s. Mom wants to start giving meaningful gifts to her grandchildren now, while she’s still around to see the impact. The listener had heard that gifted assets lose the step up in basis at death and wondered if her mother was about to make an expensive mistake. It’s a great question, and I want to give you two answers: the textbook answer, and the realistic one.
The Textbook Answer Versus the Realistic One
The textbook answer is simple: don’t gift the appreciated stock. Wait for the step up in basis at death, and it will be the most tax efficient outcome available. But the realistic answer matters more here. This woman is 88 years old. If giving money to her grandchildren now is going to bring her joy, let her do it. Don’t lead with a tax lecture when someone wants to feel the impact of their generosity while they’re alive to enjoy it. That said, if she doesn’t have a strong preference about how she gifts, there is real value in understanding the mechanics so the gift can be as efficient as possible.
Understanding the Step Up in Basis
The step up in basis is one of the biggest benefits built into the US tax code. Say you buy a stock for a dollar and it grows to $100. You now have $99 of embedded gain. Sell it while you’re alive, and you owe tax on that $99. But if you hold the asset until death, whoever inherits it receives a new basis equal to its value on the date of death. That $99 of taxable gain simply disappears. The same logic applies to the house this mother has owned since the 1970s. Given decades of appreciation, likely well beyond the available exclusion, a step up at death would let an heir sell that house immediately without owing tax on the accumulated gain.
What Actually Happens When You Gift Appreciated Assets
When she gifts stock instead of leaving it at death, the recipient inherits her original cost basis, not the current value. So if that dollar stock worth $100 gets gifted to the grandkids and they later sell it, they owe tax on the same $99 of gain. Somebody pays that tax eventually; gifting during life just shifts who pays it and when. There is a bit of tax arbitrage available depending on brackets. If the grandkids are in a very low bracket, or if she’s in a low bracket herself, selling the stock and gifting cash instead could work out fine. Ideally, though, you want to gift assets with a higher basis, or gift cash directly, rather than handing over the most highly appreciated shares.
Where the Real Risk Sits, and Where It Doesn’t
At $6 million, this family is well under the federal estate and gift tax exemption, which sits at $15 million for an individual and $30 million for a married couple. She’s unlikely to trigger any federal gift tax concern here. Depending on where she lives, though, some states have their own, much lower estate tax thresholds, so that’s worth checking locally. If she’s gifting cash and stays under $19,000 per grandchild per year, she doesn’t need to worry about the federal exclusion at all. Amounts above that simply count against her lifetime exemption, which, again, doesn’t appear to be a concern at this asset level.
A Smarter Way to Gift Without Losing the Benefit
If she has any cash sitting around, or dividends coming off that brokerage account, that’s the best source for gifts right now. Rather than automatically reinvesting dividends, let them accumulate and use that cash for the grandchildren’s gifts. That way the appreciated stock and the house, the two assets with the biggest embedded gains, stay untouched and get the full benefit of a step up down the road. It’s a simple adjustment that captures most of the tax efficiency without asking her to hold back on anything she actually wants to do.
Her Joy Matters More Than the Spreadsheet
At the end of the day, the technically optimal move is to change nothing and let everything pass at death. But that ignores what she’s actually asking for: the chance to watch her gifts make a difference in her grandchildren’s lives while she’s here for it. If cash and dividends can cover most of what she wants to give, use those first. If she still wants to gift appreciated stock or a piece of the house beyond that, let her. The tax cost of doing so is a fair price for the joy it brings her, and no financial plan should get in the way of that trade.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on gifting appreciated assets and the step up in basis, listen to the full podcast episode here.