Originally Posted by BobC
Johnny,
There is no one correct answer to your question, and the best and most advantageous way to pass on cards to one's heirs depends on a multitude of factors, starting with what would that person's estate be worth today if they passed away, including all the assets they own, not just the cards. Then you'd start considering different factors like is the person married, how many kids/heirs are there, and on and on and on. To hopefully demonstrate and explain a little better how just leaving cards to your kids in your will may not always be the best strategy, I'll provide some examples.
First off though, there's a third very realistic option that you didn't even mention in your original question. Instead of selling one's cards and then gifting the cash to your kids, you can also forego selling them and just gift the cards themselves, and then leave it up to your kids if they want to sell them or not. So having established that, there are basically three different options you can use for passing on cards, or their value. to your kids.
1. You sell the card, and then gift the sales proceeds to your kid.
2. You gift the card to your kid.
3. You leave the card to your kid in your will when you die.
And to try and simplify things for my examples, I'm going to say there is just one card to be left to a single kid, you are single at the time of your gift/death, and that one card is a very high grade '52 Topps Mantle and has a current FMV of $10M at the time of your gift/death, but when you acquired it years ago, you only paid $100K for it. And I'm going to ignore state and local taxes and just talk about federal taxes, and assume the death/gifting happens in 2022, so we'll use current 2022 tax rates.
Under Option #1, you sell the card and recognize a $9.9M gain, which we'll say for simplicity's sake is fully taxable at the max LTCG rate of 20%. So you end up paying $1.98M in federal income tax, and then gift the remaining $8.02M to you kid. Now for gift tax purposes, the first $16K of that cash is covered by the annual gift tax exclusion, so there is no gift tax on it. But that means you still have $8.004M of excess gifts this year. But instead of having to pay any current gift tax on it, you can offset the excess gift amount against your lifetime estate and gift tax exemption of $12.06M. That takes your remaining lifetime estate and gift exemption down to $4.056M going forward till at least the end of the year. So now if you died the day after making the gift to your kid, your estate would end up paying federal estate tax only if its remaining net taxable FMV (sans the card you just gifted the day before) still exceeds that $4.056M amount, at an up to 40% max federal estate tax rate. Meanwhile, your kid now has $8.02M of cash that they owe no tax on, and are free and clear to do with as they wish.
Under Option #2, you simply gift the card as it is to your kid. You somehow establish and report the card's value for gift tax purposes as $10M so, for federal gift tax purposes the first $16K of gifted value is covered by the annual gift tax exclusion of that same amount, leaving an excess gift of $9.984M. And instead of you currently paying any gift tax on this excess gift, as was done in Option #1, you simply offset and reduce this excess gift amount against your lifetime estate and gift tax exemption amount of $12.06M. Doing so reduces that lifetime exemption amount for you going forward down to $2.076M. Meanwhile, your kid now owns a $10M card free and clear. But, because it was a gift to them during your lifetime, there is no "stepped-up" tax basis for your kid to the card's then current $10M FMV. Instead, they get what is called a "carryover" tax basis, which is the same tax basis you had in the card at the time of the gift, which we said was $100K. Now if/when your kid goes and sells the card, they will likely owe a capital gain tax on the profit difference between that $100K tax basis and what it eventually sells for. So if your kid decides to sell the card the day after you gifted it to them, for simplicity we'll again assume the sale results in a LTCG subject to a max federal tax rate of 20%, which would be the same $1.98M capital gain we came up with had you sold the card as in Optin #1. However, in this case, it is your kid that owes the tax, not you. And if your kid wanted otherwise, they could hold onto the card as long as they wanted without paying to owing any taxes. And being their father, I wouldn't be too surprised if they'd occasionally let you hold onto and enjoy the card whenever you wanted. So in this instance, you will have succeeded in passing the card on to your kid, and further delaying and postponing any tax liability on its potential future appreciation.
Under Option #3, you pass away, and your kid inherits the card. Assuming you previously haven't used up any of your lifetime estate and gift tax exclusion of $12.06M, and the rest of the net taxable value of your estate is under $2.06M, your total estate is covered by that lifetime estate and gift tax exemption amount, and your estate doesn't owe or pay any federal estate tax. And in addition, because the card passed through your estate, your kid now owns the card free and clear of any tax liability, and with a "stepped-up" tax basis of $10M. Then if the day after they inherited the card your kid then sold it for the $10M it was worth, that equals their "stepped-up" tax basis so they have $0 gain, and $0 federal income tax due, but now they would have $10M cash free and clear to do with as they wished.
Based on just this simple scenario and examples, it sure seems Option #3 would always be the way to go, right? Well, in one of my earlier posts I mentioned how the sunset rules built into the tax act that Trump signed back in 2017 were going to take effect in 2025, with no one having to do anything. And as part of that, the lifetime estate and gift tax exemption amount is going to be drastically cut, possibly by upwards of $6M or more. So instead of the current $12.06 lifetime estate and gift tax exemption being in effect, let's say you wait for 2025 for this scenario and these different options to happen, and now the lifetime estate and gift tax exemption amount is only $6M. Now if you go back and recalculate some of those potential estate and gift taxes due from my earlier examples above, they're going to end up being a hell of a lot more in some cases.
For example, if you gift the card to your kid as in Option #2, it's $10M value, less the $16K annual gift tax exclusion amount, is now way over the new $6M lifetime estate and gift tax exemption amount. That means by making that gift, you've run down your remaining lifetime estate and gift tax exemption amount to $0 going forward, and will currently owe federal gift tax (at up to a 40% max rate) on the $3.984M ($10M - $16K - $6M) excess that is now subject to a gift tax. And since the card in this case was a gift, your kid still gets stuck with a "carryover" tax basis from you of $100K. So if they then sold the card for $10M the day after receiving it as a gift, they will also now currently owe income tax on the $9.9M capital gain they just got from selling it. So if I assume that entire gain was taxed at the max 20% LTCG rate, that means the kid will owe $1.98M ($9.9M X 20%) of income tax on the card's sale, leaving them with $8.02M of cash, free and clear. But now, you have to figure out how to pay the gift tax of upwards of $1.5M because you gifted your kid the card. That reduces your current assets/cash and potentially what you would otherwise be able to leave to the kid in the future when you eventually pass on. It can also create a huge issue if you don't currently have that kind of cash available with which to pay the gift tax that would then be due.
Similarly, if you instead passed away in 2025, the card's $10M value alone would exceed the then newly reduced lifetime estate and gift tax exemption amount I estimated at $6M, but you'd also lose the $16K annual gift tax exclusion as well. So now the card's value alone creates a taxable estate of at least that $4M ($10M - $6M) difference, and your estate would end up having to pay an up to 40% estate tax on that $4M excess value of the card over your lifetime estate and gift tax exemption amount. The good news under this Option #3 scenario though is that the "stepped-up" basis rules (at least for now) are still in place so your kid would inherit a "stepped-up" tax basis of $10M on the card, and could then sell it then next day after inheriting it for that same $10M and have $0 gain and $0 tax due. But the bad news maybe is, what if that card is the only real valuable asset in your estate. Rather than being able to pass the card on to your kid, the estate's executor/fiduciary may be forced to sell the card in order to generate the funds needed to pay the estate tax now owed by the estate, and only pass the remaining cash on to your kid then. Or if the executor/fiduciary did pass the card on to your kid, they'd need to make sure your kid immediately sells it so they can pass the money back to the estate to cover the federal estate tax due. And if generating that cash to pay the tax bill takes too long, the federal estate tax payment can end up being paid late, potentially incurring additional interest and penalty charges on top of the actual estate tax due. So under some circumstances like these, even if the original intentions of all parties involved was for your kid to inherit and then keep the card in the family, they may not be able to.
And one last thing to also consider. When that lifetime estate and gift tax exemption does eventually get cut in 2025, or has any other earlier or later reductions to it as politicians fight and argue about it in Washington, once that exemption is cut those potential tax savings are gone. So if you have this same $10M card come 2024, and see that the following year they're going to cut say $6M from the lifetime estate and gift tax exclusion amount, you may want to go ahead and make the gift of that card in 2024 to take advantage of the higher exemption amount. Once they cut the exemption amount, the government and the IRS can't go back and suddenly make you pay federal gift (or estate) taxes on prior gifts (or estate value) that now would exceed the newly lowered exemption amount. So in this instance, again depending on all the other contributing facts and circumstances involved, waiting till you pass away to leave your kids some cards may not always be the best way to go after all.
Hope this helps to make it more understandable. And sorry for all the detail and length it sometimes takes to explain these things. I've barely touched on all the different factors and circumstances that could influence and impact a question like yours. And even then, what I'm telling you now could change entirely in the coming weeks, months and years. And when it comes to taxes and tax laws, they only thing that is never changing.........is that they are always changing!
|