Many parents want to gift their highly appreciated home or stock portfolio to their children while they are still alive. This is almost always a catastrophic tax mistake due to the loss of the 'step-up in basis.'
Carryover Basis vs. Step-Up in Basis
When you gift an asset while you are alive, the recipient takes your original purchase price (your 'carryover basis'). If you bought a house for $100,000 and gift it to your daughter when it's worth $1 million, her basis is $100,000. If she sells it, she owes capital gains tax on $900,000 of profit.
Important
The Death Benefit
If you hold that same house until you die and leave it to your daughter in your will, her basis 'steps up' to the fair market value on the date of your death ($1 million). If she sells it the next day for $1 million, she owes zero capital gains tax.
The Exception: Rapid Future Growth
The only time it makes sense to gift a highly appreciated asset while alive is if you expect it to appreciate so rapidly that the future estate tax (40%) will be far worse than the current capital gains tax (20%). This is where advanced trusts like GRATs come into play.