Q Last year I received a substantial inheritance, most of which was stock from my father’s estate. He had held these shares for many years and most of the shares had appreciated substantially since his date of purchase. I own shares of stock that have appreciated quite rapidly over the past two years, but these stocks have a smaller gain in them than those I inherited. I am contemplating making a large contribution to my church’s capital building campaign, and I need to know which shares of stock I should contribute in order to receive the most favorable tax results.
AYou should contribute your shares. The shares of stock you received from your father’s estate received a “stepped-up” basis to their fair-market value at his date of death. Given the recent stock market performance, it is unlikely that they have appreciated substantially since his date of death. Accordingly, there is probably little appreciation in these shares. You could sell these shares and owe little in the way of federal and state income tax on the proceeds.
On the other hand, you can reap substantial tax benefits by gifting the appreciated shares of stock that you have owned personally. By doing so, you can receive a federal and state income-tax deduction equal to the fair market value of the stock at the date of the gift, with all unrealized appreciation going untaxed for federal and state income-tax purposes.
Q As part of my estate-planning process, I would like to leave my personal residence to one of my children through my will. Will my child be eligible to use the $500,000 income-tax exclusion on the gain from the sale of the personal residence if she is married?
A In general, all assets included in your estate at date of death receive a “stepped up” basis to their value at that time, so income taxes on all previous appreciation on the property are forgiven (not subject to federal or state income taxes). Any appreciation on the residence following the date of your death would be subject to federal and state income taxes, as a general rule.
However, if your child began using your residence as her personal residence then, once she had lived there for at least two years as her personal residence, any gain following your date of death would also be forgiven. Alternatively, if she held your residence and rented it out following the date of death, thereby converting it to rental property, she could effect a tax-free exchange of the property in order to avoid federal and state income taxes.
