Gifting inherited equities to spouse

[OddGuy]

DW and I keep primarily separate finances, and have for decades. We file a joint return and title real estate jointly, but for day to day decisions, we handle expenses individually, based on comfort level relative to our incomes. It works for us.

I recently inherited equities in the form of stocks, bonds and mutual funds. The entirety is in a brokerage account I’ve had for some time. My intent is to have my fiduciary broker set up an account at the same firm in DW’s name only, and fund it with $1M in equities, basically picking from this new pile of stock shares, etc, until the number is met. At that point, DW will have full control of what to do with the assets, whether that means keeping them there, selling portions, changing investments, etc. This will be a substantial amount of money that can be allocated as she sees fit.

All I’ve read states the marital gift tax exclusion is unlimited. The recent inheritance aspect steps up the value of the individual stocks and funds.

Is there anything else I’m missing?

 

[CaliKid]

What's your goal here?

 

[cathy63]

Gifts to your spouse are never taxable gifts from the IRS' perspective. I don't know if that's true in every state, so you might want to confirm that for your state.

Do make sure the stepped-up basis is set correctly in the current account before you move securities to your DW's account. It's fewer times things have been moved around, the easier it is to get the basis verified and fixed if it's wrong.

 

[Route246]

Everything we own is joint except for retirement accounts. I did this because I wanted minimal issues if I die unexpectedly. Her name is on everything we own. She still has an account in her name only but it is not significant. I have always lived by the motto, "What's mine is ours and what's ours is hers." LOL.

Is there any issues keeping things separate if one of you dies unexpectedly? At our FI asset level that is a very scary concept.

 

[SecondCor521]

Is there anything else I’m missing?

It depends on state law, but generally inherited assets are separate property as long as they are not commingled. So your gifting to your spouse would impact asset division in the case of divorce. Hopefully that is not a concern, but you asked if you were missing anything.

 

[GrayHare]

It sounds like you're trying to minimize taxes (always a wise thing) but I do not see that such an xfer makes any difference in taxes. The federal estate tax exemption is portable, at least presently. There is no step-up in basis upon the xfer to a spouse you describe. So, I'm not seeing any tax savings. Is it maybe something specific to your state? Or maybe I'm missing something?

 

[Badger]

I guess I just don't understand the problem. What difference does it make if you opened a joint account with the equities and just left it for her to do with it what she wants.

 

[Aerides]

From a tax perspective the IRS (pretty sure, cathy63 can confirm) does not care what you do as far as transferring money between spouses and calling it gifts or whatever, you are basically one entity tax wise, MFJ.

It's already yours and hers now, and still will be even if the new account only has her name on it.

(Inheritances can be separate I think for things like marital assets in divorces, but once they are co-mingled that goes out the window.)

 

[Exchme]

I guess I just don't understand the problem. What difference does it make if you opened a joint account with the equities and just left it for her to do with it what she wants.

+1
I'm no lawyer nor an accountant, but I can't figure out what problem OP thinks this solves either. I presume this is not a community property state, but even so, a joint account mostly does the same thing. The only differences I can see would be in divorce or her death.

-If they divorce, assets passed solely to DW stay solely with DW.

-If OP passes first and has children from a previous marriage or other named heirs in the will, they do not get the gifted assets as those will be DW's estate. If DW is the only heir, then the gifted assets obviously would not get any step up basis on OP's death as they would already have belonged solely to DW.

-If DW passes and has children from a previous marriage or other heirs named in the will besides OP, they would get the gifted assets, not OP. If OP is the only heir, the gifted assets would get a step-up basis on DW's death.

Whichever of them pass first, the unused portion of the deceased estate exemption ($13.61M) is portable to the survivor.

If there is some kind of complexity (mixed family, pre-nup, difference in spousal health, need to minimize state or federal estate taxes), OP should be talking to an estate attorney, not non-specialists on the internet.

 

[punkinhead]

I never thought of this before, but if gifting a spouse isn't a taxable event and there's a step up in basis wouldn't it be prudent to always gift to a spouse before any withdrawal from a taxable account to avoid capital gains? Seems like quite a loophole.

 

[MarieIG]

I never thought of this before, but if gifting a spouse isn't a taxable event and there's a step up in basis wouldn't it be prudent to always gift to a spouse before any withdrawal from a taxable account to avoid capital gains? Seems like quite a loophole.

I'm having trouble understanding the question. Withdrawal of an asset is not necessarily the same as selling it, and if you are gifting, for example, share of stock/ funds, wouldn't the receiver of the gift take the basis of the donor?

 

[Texas Proud]

I never thought of this before, but if gifting a spouse isn't a taxable event and there's a step up in basis wouldn't it be prudent to always gift to a spouse before any withdrawal from a taxable account to avoid capital gains? Seems like quite a loophole.

No step up in basis....

 

[SecondCor521]

I never thought of this before, but if gifting a spouse isn't a taxable event and there's a step up in basis wouldn't it be prudent to always gift to a spouse before any withdrawal from a taxable account to avoid capital gains? Seems like quite a loophole.

Gifting never results in a step up in basis. The receiver of the gift generally(*) gets the giver's basis (and holding period).

(*) There is a wrinkle if the gift has gone down in value from purchase to gifting, but that's still not a step up in basis. Oh, and there is also exception if the receiver is a 501(c)(3) charity and the asset holding period was long term. There may be other corner cases.

 

[Dtail]

Perhaps can make a difference if married filing separate?

 

[HI Bill]

I would keep the inheritance separate in the hopefully unlikely event of a divorce. If you want each of you to have more equal assets, you could add her name to the accounts that you already have, assuming that you funded them during your marriage (and they'd be subject to splitting). This would protect the inheritance from a 50% loss during a divorce.