A gift of $19,000 in stock and a gift of $19,000 in cash look identical on paper. To the recipient's future tax bill, they can be very different. The difference comes down to a rule called carryover basis, and it's one of the most common mistakes we see in lifetime gifting plans.
How carryover basis works
When you give appreciated stock during your lifetime, the recipient does not get a fresh start. They take your original cost basis and your holding period. If you bought shares years ago for $20,000 and they are now worth $100,000, gifting them means the recipient's basis is still $20,000. If they sell, they owe capital gains tax on $80,000 of appreciation, the same gain you would have owed had you sold it yourself.
Cash carries no such baggage. A $19,000 cash gift is simply $19,000 to the recipient, with no embedded tax liability. This is why gifting your most appreciated assets during life is often the least efficient way to transfer wealth, even though it feels intuitive to give away the assets that have grown the most.
The flip side: assets held until death
Assets that pass at death, rather than by lifetime gift, generally receive a step-up in basis to fair market value as of the date of death. That same $20,000-basis stock, if held until death and then inherited, would typically get a new basis of $100,000, erasing the built-in gain entirely for the heir. This creates a real tension in gift planning: lifetime gifts above the annual exclusion use up lifetime exemption and remove future appreciation from your estate, but they also forfeit the step-up that comes with holding an asset until death.
How to think about which assets to gift
- Cash and assets with little unrealized gain are generally efficient lifetime gifts, since there's little or no basis trap to worry about
- Highly appreciated assets are often better held until death to capture the step-up, especially if the estate is comfortably under the applicable exemption
- Loss assets should almost never be gifted during life, since the built-in loss is typically wasted; selling first to realize the loss, then gifting the cash, usually preserves more value
- For estates approaching the New York cliff, the calculus shifts, because removing appreciating assets from the estate early can prevent future growth from pushing the estate over the threshold, even at the cost of a lost step-up
The right answer depends on the size of the estate, how close it is to the federal or New York thresholds, and how much unrealized gain sits inside any given asset. These are exactly the tradeoffs we help clients evaluate as part of a full plan. Read more about our tax planning services and our estate and gift tax planning work, and see our New York estate tax cliff guide for how gifting interacts with the state cliff.
Before you gift appreciated stock, make sure you understand the basis consequences. Schedule a free consultation or call +1 212 518 3868.
