Should You Gift Appreciated Assets or Cash?

Understanding Basis Planning for the Next Generation

When you want to help a child with a home purchase, support a grandchild's education, or simply start transferring wealth to the next generation, your instinct is usually to gift cash - right? It's simple. It's immediate. But, it may not be the smartest move.

The truth is, the type of asset you gift can make a significant difference in how much tax your family ultimately pays. The key concept is cost basis - and understanding just two rules around it can save your family tens of thousands of dollars or more.

The Two Rules That Change Everything

Rule 1: When You Gift During Your Lifetime

Here’s how it works: when you gift an asset while you’re alive, the recipient inherits your original cost basis - the price you originally paid for it. So if you bought a stock at $50 a share and it’s now worth $200, the recipient’s basis is still $50. If they sell, they owe capital gains tax on the full $150 per-share gain.

Rule 2: When Assets Are Inherited at Death

Assets that pass to heirs at death get what’s called a "step-up" in basis - essentially, the basis resets to the fair market value on the date of death. Using the same example: if that stock is worth $200 when you pass, your heir’s new basis is $200. If they sell right away, they owe zero capital gains tax. That’s a pretty powerful thing.

That’s why understanding when to use each approach - gifting now versus holding for the step-up - is one of the most valuable conversations we have with our clients.

So, When Should You Gift Assets vs. Cash?

It depends on the situation. Here are the scenarios where each approach tends to make the most sense.

Gift appreciated assets when...

• The recipient is in a lower tax bracket. In 2026, the 0% long-term capital gains rate applies to taxable income up to $49,450 for single filers and $98,900 for married couples filing jointly. A child in college or early in their career may be able to sell gifted stock and pay little or no capital gains tax.
• You want to reduce your future estate size. Gifting an asset removes it - and all of its future growth - from your estate. The sooner you transfer an appreciating asset, the more growth stays out of your taxable estate.
• You're making annual exclusion gifts. In 2026, you can gift up to $19,000 per recipient ($38,000 if married and splitting) without using any of your lifetime exemption. Gifting appreciated stock within this limit each year is a straightforward way to get started.

The situation shifts, though, when an asset has been in your portfolio for a long time.

Hold for the step-up when...

• The asset has a very low basis relative to its value. Take, for example, a stock you bought decades ago for $10,000 that's now worth $1 million - it has $990,000 in embedded gains. Gifting it during your lifetime means your heir will eventually owe tax on that gain. Holding it until death eliminates that tax entirely.
• You don't need to sell or transfer the asset(s) now. If the asset isn't creating a problem for your estate or overall wealth plans, then there's no rush. Let it benefit from the step-up.
• You want to preserve flexibility. Keeping the asset gives you options: sell it, donate it to charity for a full fair-market-value deduction, or let it pass with a stepped-up basis.

And sometimes, the simplest move really is just cash.

Gift cash instead when...

• The asset has little or no embedded gain. If you recently purchased the investment, gifting cash versus the asset makes minimal difference.
• The asset has an unrealized loss. In that case, sell it yourself first - harvest the loss for your own tax benefit - then gift the cash proceeds.
• The recipient needs liquidity immediately. If they're going to sell right away regardless, the tax outcome may not justify the complexity.

A Look At Both Options In Action

Let’s put some real numbers behind this. A parent in the 37% ordinary income bracket wants to give $100,000 to their adult child, who is in the 15% long-term capital gains bracket. The parent holds stock with a $40,000 cost basis, now worth $100,000.

By gifting the stock instead of cash, the family saves $5,280 in this scenario alone. Over years and across multiple assets, these differences compound significantly. 

A Note for Connecticut Residents

One thing worth flagging for our Connecticut clients: the state is the only one in the country with its own gift tax, layered on top of the estate tax. The exemption aligns with the federal level at $15 million per person, so for many families it won't come into play. But for those approaching that threshold, there's an important difference - Connecticut doesn't allow a surviving spouse to inherit their partner's unused exemption. It's the kind of detail that sounds small on paper but can have a meaningful impact, which is exactly why trust planning matters here.

Key Takeaway

The choice between gifting cash and gifting assets isn’t just about generosity - it’s about making sure as much of your wealth as possible reaches the people you care about. The right answer looks different for every family, and that’s exactly the kind of conversation we love having with our clients.

Ready to optimize your strategy?

If you’re thinking about gifts to family members this year, we’d love to sit down and walk through which assets make the most sense to transfer. Reach out to our team - we’re happy to help you put a strategy together.

Phone: (860) 838-3730

Email: entrust@entrustwp.com