Don’t Gift Assets To Children

Why Gifting Assets to Your Children Before Death Could Cost Them Thousands in Taxes

Many people believe that the simplest way to avoid estate planning is to just gift assets to their children while they’re still alive. No will. No trust. No lawyers. Problem solved, right? Not quite. In 2025, this approach can expose your family to serious legal risks and cause them to miss out on significant tax benefits. Attorney Stuart Green explains why proper estate planning beats early gifting almost every time.

1. Asset Protection: Your Gift Could Become Someone Else’s

When you gift assets to your children during your lifetime, those assets become legally theirs—which means they’re also exposed to your child’s personal creditors.

Here’s what that means in practice:

• Divorce: If your child goes through a divorce, the assets you gifted could become part of the marital estate and subject to division.
• Lawsuits: Whether it’s a car accident, a slip-and-fall on their property, or a malpractice claim, your child could be sued—and those gifted assets could be seized to satisfy a judgment.
• Business failures or debts: If your child faces financial hardship, creditors may come after the assets you transferred to them.

Even if you’re still depending on those assets—say, to pay for long-term care, your mortgage, or everyday expenses—you’ve lost control. Once the gift is made, you’re relying on your child’s goodwill and their financial stability.

The bottom line: Trying to sidestep estate planning by gifting assets early opens the door to legal exposure that a properly structured will or trust would have prevented.

2. The Step-Up in Basis: A Massive Tax Benefit You Don’t Want to Lose

This is where the financial consequences get serious.

How Tax Basis Works

When the IRS calculates capital gains tax, they compare:

• Sale price (fair market value when sold)
• Tax basis (what you originally paid for the asset)

Example:

You bought a stock for $1. Years later, it’s worth $10. If you sell it, you owe capital gains tax on the $9 gain.

What Happens When You Gift the Asset

If you gift that stock to your child during your lifetime, your child inherits your original $1 basis. When they sell it for $10, they pay capital gains tax on the full $9 gain.

What Happens When You Pass It Through Your Estate

If you hold the asset until death and pass it to your child through your estate plan (via a will or trust), your child receives a step-up in basis to the fair market value at the time of your death.

So if the stock is worth $10 when you pass away:

• Your child’s new basis is $10.
• If they sell it immediately for $10, they owe $0 in capital gains tax.
• Even if they sell it later for $11, they only owe tax on $1 of gain—not $9.

Why This Matters for Real Estate

This is especially critical for personal residences or other highly appreciated assets like family homes, rental properties, or investment accounts.

Many parents want to gift the family home to their children early to “keep it in the family.” But doing so can trigger a massive tax bill down the road when the children sell the property—one that could have been entirely avoided with proper planning.

3. Proper Estate Planning Protects Both Control and Tax Benefits

A well-drafted estate plan—whether through a will, a trust, or both—allows you to:

• Maintain control of your assets during your lifetime.
• Protect those assets from your children’s creditors, divorces, and lawsuits.
• Preserve the step-up in basis so your heirs pay little to no capital gains tax.
• Direct how and when your children receive their inheritance (especially important for minors or children with spending issues).

Trusts, in particular, offer additional benefits like avoiding probate, maintaining privacy, and providing long-term asset protection for your heirs.

Key Takeaway

Gifting assets to your children before death might seem like a shortcut around estate planning—but it’s a costly one. You lose:

• Asset protection for yourself and your children.
• The step-up in basis, which can save your family thousands (or even hundreds of thousands) in capital gains taxes.
• Control over how and when assets are distributed.

For most families, holding onto assets and passing them through a properly structured estate plan is the smarter, safer, and more tax-efficient strategy.

FAQs

Q: Can I ever gift assets to my children without losing the step-up in basis?
No. Lifetime gifts always carry over your original tax basis. Only assets passed at death receive a step-up.

Q: What if I want to help my children now?
You can gift up to the annual exclusion amount ($18,000 per recipient in 2024, indexed for inflation) without tax consequences. But for larger transfers or highly appreciated assets, consult an estate planning attorney first.

Q: Does the step-up in basis apply to all assets?
Most assets receive a step-up, including stocks, real estate, and business interests. Retirement accounts like IRAs and 401(k)s do not.

Q: What if I’ve already gifted assets to my children?
It may not be too late to restructure. An estate planning attorney can help you explore options like creating a trust or unwinding certain gifts if appropriate.

Q: Isn’t estate planning expensive?
The cost of a solid estate plan is almost always less than the taxes, legal fees, and family conflict that result from not having one. Think of it as insurance for your legacy.

Q: Do I need a trust, or is a will enough?
It depends on your situation. Trusts offer more control, privacy, and protection—but even trust-based plans should include a will. A consultation with an estate planning attorney can help you decide.

This is not legal advice. Use this for educational purposes only