There’s an easy way to pass valuable assets to family members.

Strategy: Make lifetime gifts. Under the current rules, you can almost certainly avoid any federal gift tax liability. Nevertheless, the basis of the property you’re gifting can make a big income tax difference.

Here’s the whole story: Under the annual federal gift tax exclusion, each person can give each recipient assets valued at up to $18,000 in 2024 (up from $17,000 in 2023) without any gift tax impact. If the gift exceeds the annual exclusion, it can be sheltered by the unified federal gift and estate tax exemption of up to $13.61 million for 2024 (up from $12.92 million for 2023). Although you may have your reasons for gifting specific assets, factor taxes into the equation. Notably, the recipient generally carries over your tax basis, except if the property has declined in value. Then the recipient is stuck with a basis equal to its fair market value (FMV). Accordingly, observe two rules of thumb for gifts to lower-tax-bracket family members. 1. Give away low-basis property that is appreciating in value. That way, when the property is sold, the gain is taxed to the recipient in their lower tax bracket instead of to you in your higher tax bracket. 2. Keep high-basis property that is declining in value. If you give this property to a lowbracket family member, there will be a small tax loss, or no tax loss at all, because the recipient’s basis is limited to the FMV of the property. However, if you keep the property and sell it yourself, you can probably claim a tax-saving capital loss. Example: You own stock with a basis of $25,000 that’s currently worth $15,000. If you give the stock to your granddaughter, her basis is $15,000. If she then sells it for, say, $14,000, she has a loss of just $1,000. Alternatively, you can sell the stock yourself and realize a $10,000 capital loss. Then you can give your granddaughter $15,000 in cash. She’s no worse off than before, but you’re in better tax shape. Tip: Don’t let the “tax tail wag the dog,” but don’t ignore the tax bite either.