Selling a card you inherited - Income tax

[parkplace33]

If I get a card through an inheritance in an estate(let’s say it is valued 50k) and I then sell it for 50k, do I pay income tax on the 50k?

[rhettyeakley]

I imagine it depends on what was reported when you inherited it. Was it through an estate that you paid some inheritance tax on when it was rec’d or whether you were handed the card by a relative and it was never reported as having been inherited by you. I am not a tax professional or anything but more info is likely needed before an accurate answer can be given.

[parkplace33]

Originally Posted by rhettyeakley

I imagine it depends on what was reported when you inherited it. Was it through an estate that you paid some inheritance tax on when it was rec’d or whether you were handed the card by a relative and it was never reported as having been inherited by you. I am not a tax professional or anything but more info is likely needed before an accurate answer can be given.

Through an estate. Will add to the post.

[RL]

yes, you can go to the IRS site for a lot of information

[Peter_Spaeth]

I defer to the accountants here, but I thought with an inheritance you get a step up basis to FMV .

[mrreality68]

Sounds like a question for Bob C. He has the qualifications and the knowledge for this question. And he knows how to make it easily understandable

[MikeGarcia]

Originally Posted by RL

yes, you can go to the IRS site for a lot of information

.. use a public library computer if you think you need to divulge any specific details though. ;.IRS is adding several new hires , and a Q like yours coming in over the transom can be easy pickin's for a hot dog new hire. Just a thought. PARANOICS spend less time in court than your average Jose.

..

[swarmee]

AFAIK (not a lawyer or accountant)

If you inherited this year and sold this year, then the your cost basis would be equal (effectively) to your sale value, and you would not show a profit and therefore wouldn't owe tax.

If you inherited 10 years ago when a T206 Ty Cobb was $500 and sold it now for $10,000, you would owe tax on a profit of $9,500.

[jboosted92]

Originally Posted by parkplace33

If I get a card through an inheritance in an estate(let’s say it is valued 50k) and I then sell it for 50k, do I pay income tax on the 50k?

ill respond for the group

"what card, you didnt inherit" ?

[Johnny630]

So what’s better for your family? Dying with the cards and passing them on through an estate or selling them prior and gifting the money to them?

Seems like if they’re in your will to be passed down croaking with cards is a better tax situation for your heirs.

[Directly]

I assume this discussion is referring to only one card, what about 50 cards --- does each card need to be listed and valued separately in the will or can we show a lump sum of value?--50 cards valued at $$$$.

[swarmee]

Originally Posted by Directly

I assume this discussion is referring to only one card, what about 50 cards --- does each card need to be listed and valued separately in the will or can we show a lump sum of value?--50 cards valued at $$$$.

Are you going to sell all 50 cards in one lot or one calendar year? Or are you going to sell them over multiple years as individual cards? You are best getting new FMV's for all cards, IMO.

[BobC]

Originally Posted by Directly

I assume this discussion is referring to only one card, what about 50 cards --- does each card need to be listed and valued separately in the will or can we show a lump sum of value?--50 cards valued at $$$$.

Great question Tom. I've only been using a single card in my scenarios and examples to keep things simple and easier to explain. But you're absolutely right, if there are multiple cards, then you are technically supposed to figure out and keep track of the tax basis of each separate card. That way, if you break out and only sell one, or even just a few, of the cards inherited, you can properly list the tax basis when you report their sales.

Just to be technically correct, the value of the cards would most likely not be shown in the will, nor would I expect them to be specifically listed, unless the inheritance was of a rather small collection of really significant cards, like say a T206 Wagner or '52 Topps Mantle maybe. A person's will can be written at any time, many years before they pass on. And the values of particular items, say in someone's card collection, can obviously change over time, along with the actual cards in that collection as well. No one is going to keep going back and be constantly re-writing and amending their will (and paying their attorney to do so) just to update the value of their card collection, or likely the list of all the specific cards in it. At least no sane person I've ever met or heard of. LOL

Having said that, if the will just says I leave my card collection to my son/daughter, that is it, there is no listed value or inventory. In that case, it is really up to the executor/fiduciary in charge of the decedent's estate to inventory and take control of all the decedent's assets and debts, determine the value of all those items for potential estate tax purposes, and to then see to it that the terms of the will are carried out to the extent legal and possible, in accordance with the laws of the state the estate is in. Chances often are that one of the beneficiaries may also be the executor/fiduciary, or not. Regardless, I normally wouldn't expect the executor/fiduciary to even try and determine specific values for every single card in larger collections. This is where if it's your collection, it can really help your family out to have an inventory or some kind of listing of what all is in it to assist in the valuation that may be needed for your estate's purposes after you pass. Or alternatively, in determining the values to be used for coming up with the "stepped-up" tax basis of the cards for your heirs. Most likely though, if someone's net taxable estate value in total is going to be nowhere near the amount that would require any federal estate tax return be filed, or estate tax paid, the executor/fiduciary will likely not waste much time or energy in seeking appraisals and such, and will just do whatever the probate court overseeing the estate minimally requires of them. In all honesty, if the will doesn't even mention a card collection, or if there isn't a will at all, I wouldn't be surprised if the collection just suddenly turns up in the possession of a son(s)/daughter(s), with no one telling the probate court anything about it at all.

So unless in the extreme rare occasion that an executor/fiduciary would get specific inherited cards appraised and valued, it will most likely be up to whomever actually inherits the cards to figure out (and if needed estimate as best they can) the then current FMV of the cards they just inherited. And in the case of something like say a set, or partial set, where they maybe come up with an overall valuation for the entire set/lot, when they go to sell it, maybe back out the superstar/HOFer cards and separately value them, and then just take the remaining balance of the overall appraised value of the set/lot, and average it out over how many cards are left.

In other words, say you have some set/lot of 50 cards you inherited, probably worth about $2,000 according to some pricing guides, dealers, etc. You pull out the maybe 10 HOF/major rookie cards in the set and figure the FMV of each, and when you add them up it totals $900. So for the valuation of the remaining 40 common cards in the set, I'd calculate the average value per card as follows:

$2,000 - $900 = $1,100 / 40 cards = $27.50 per card

For something like this, the best you are probably going to be able to do is to estimate values just like as in my above example. And if the executor/fiduciary of the estate does come up with an overall valuation/appraisal for the card collection, be sure to use that as your overall starting point to then be divvied up between all the different cards in the collection. Just like in my example above. if the entire collection were valued by the executor/fiduciary at $2,000, and you could really only find say 10 cards worth individually valuing and selling. Just spread the rest of the remaining collection value evenly over the rest of the cards. Just be sure to write what you're doing down so you have some record as to your method and logic. And be sure keep track of the cards you sell and what you sell them for.

And if on the off chance you ever did have to explain what you did to an IRS agent, they most likely will have no clue as to what you're talking about, or if they do know, will realize what an impossible PITA it is for you to be able to create completely accurate records, and will likely give you the benefit of the doubt and agree with you as long as what you're doing seems at least somewhat reasonable and consistent. Unless you do end up inheriting some really, really big value cards, IRS agents aren't likely going to waste a lot of time and effort, if any, questioning your estimating their valuations when you sell them.

Hope this helps.

[obcbobd]

Originally Posted by Johnny630

So what’s better for your family? Dying with the cards and passing them on through an estate or selling them prior and gifting the money to them?

Seems like if they’re in your will to be passed down croaking with cards is a better tax situation for your heirs.

I don't follow your logic. $50K or cards or $50K of cash, how are they treated differently for tax purposes? If you sell the card ten years later for $60K, you have to declare the $10K profit. Same if you invest $50K in a fund and you sell those shares later for $60K, you have a profit of $10K

I guess it would be easier to sell the cards and not declare anything. Also a lot more work.

[BobC]

Originally Posted by obcbobd

I don't follow your logic. $50K or cards or $50K of cash, how are they treated differently for tax purposes? If you sell the card ten years later for $60K, you have to declare the $10K profit. Same if you invest $50K in a fund and you sell those shares later for $60K, you have a profit of $10K

I guess it would be easier to sell the cards and not declare anything. Also a lot more work.

Bob,

I think what Johnny was really asking was more along the lines of if it is better to make a gift during one's lifetime, or wait and pass an item through to one's heirs at death.

Plus, what you are saying is not necessarily entirely correct as there can be a very huge difference between gifting or leaving your kids $50K of cards or $50K of cash. Did you ever consider the very distinct possibility that the person gifting/leaving the cards to his kids may have actually paid a much lower amount for them, and therefore their tax basis in them is way lower than $50K? Or in the case of some of these ridiculously priced ultra-modern cards it is even possible the tax basis could be much higher, and the card values have since dropped down to just $50K. Either way, that differing tax basis in the owner's hands can have a significant effect on what may be the best course of action for the cards' owner to transfer these cards, or at least their value, to his kids. In my next post I'll respond to Johnny's original question and explain further and in more detail.

[insidethewrapper]

I agree completely. Pay your taxes. I was wondering how much Uncle Sam lost in revenue at the National with all those "Cash Only" sales.

[Johnny630]

Originally Posted by BobC

Bob,

I think what Johnny was really asking was more along the lines of if it is better to make a gift during one's lifetime, or wait and pass an item through to one's heirs at death.

Plus, what you are saying is not necessarily entirely correct as there can be a very huge difference between gifting or leaving your kids $50K of cards or $50K of cash. Did you ever consider the very distinct possibility that the person gifting/leaving the cards to his kids may have actually paid a much lower amount for them, and therefore their tax basis in them is way lower than $50K? Or in the case of some of these ridiculously priced ultra-modern cards it is even possible the tax basis could be much higher, and the card values have since dropped down to just $50K. Either way, that differing tax basis in the owner's hands can have a significant effect on what may be the best course of action for the cards' owner to transfer these cards, or at least their value, to his kids. In my next post I'll respond to Johnny's original question and explain further and in more detail.

Thanks Bob !

[Peter_Spaeth]

Originally Posted by Johnny630

So what’s better for your family? Dying with the cards and passing them on through an estate or selling them prior and gifting the money to them?

Seems like if they’re in your will to be passed down croaking with cards is a better tax situation for your heirs.

Right, because if you sell during your lifetime, you owe tax on any profit, whereas your heirs get a stepped up basis. But there may be countervailing considerations such as reducing the size of your estate through a lifetime sale.

[BobC]

Originally Posted by Johnny630

So what’s better for your family? Dying with the cards and passing them on through an estate or selling them prior and gifting the money to them?

Seems like if they’re in your will to be passed down croaking with cards is a better tax situation for your heirs.

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 Option #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 or 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, the only thing that is never changing.........is that they are always changing!

[ruth-gehrig]

Bob you're pretty awesome! Your posts make learning about taxes, and these various scenarios, interesting

[BobC]

Originally Posted by ruth-gehrig

Bob you're pretty awesome! Your posts make learning about taxes, and these various scenarios, interesting

LOL

Not sure I've ever heard someone talk about this kind of stuff being interesting before. It can often be extremely complex, with an awful lot of gray areas though. Most people think tax law is pretty much black and white, but that is so far from the truth. In my case, I have the advantage of having been involved with so many different people and their tax situations over the last 4-5 decades that I can probably relate to and talk about almost anything people on here will ask about.

Hopefully at least a few members will get some answers to tax and/or estate related questions they may have in regards to their collections and activities. I apologize to those that may take offense at my "six walls of text" in trying to answer and explain different things. But if you take the time to read and follow what I'm saying, you'll quickly realize that real short and quick one or two line answers usually won't cut it, and can often end up giving the wrong or an incomplete answer to someone's question. Plus, I've always felt that the more someone knows about the true and complete background behind things, the better they can then understand and appreciate how they truly work.

[Johnny630]

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!

Thanks Bob. This is very informative detailed information, I love it !