One big misconception is that the recipient is going to have income tax repercussions. “The second biggest misconception is that most people think they are going to have to pay federal estate taxes,” Garry added. “Most estates won’t have federal estate tax liability.”
“Before giving money to friends and family, you need to be sure that you can financially afford to do so and that you’re going to be emotionally prepared for whatever way the recipient plans to use the gift,” Garry said. “If there are strings or a contract on what they’ll use it for, it’s not a gift.”
“The best vehicle to give depends on your goals and situation and that of your recipient,” Garry said. “If you think you’re near your life expectancy and won’t live too long, then cash might be best. If you give an asset that has cost basis, like a property or stock, the tax consequences differ depending on whether you pass it by gift or at your death. If you give a gift, the recipient gets your cost basis. If you pass it at your death, the cost basis steps up to the value on the date of your death.
“If you’re 98 and want to give your stock that you bought for $1 million that’s now worth $10 million to your daughter, it would probably be better to wait to give it at your death,” Garry said. “If she inherits it, she won’t have embedded gains.”