In this episode, Tim talks about how to reduce or eliminate capital gains tax through estate planning.
Podcast Transcription:
WRVO Producer Mark Lavonier:
This podcast is part of the series Estate Planning Pro Tips, hosted by attorney Tim Crisafulli of Crisafulli Estate Planning and Elder Law P.C., an estate planning, probate and elder law firm serving clients throughout central New York. A former school teacher, Tim explains complex legal subjects in an easy-to-understand way. The commentaries focus on the central aspects of estate planning, such as wills, trusts, asset protection, long-term care, and probate. And now here's Tim.
Tim Crisafulli:
As life inevitably reveals, taxes come in many delicious flavors. There's income tax, sales tax, property tax, gift tax, estate tax, the list goes on and on. The good news is that effective estate planning offers an opportunity to reduce or eliminate the capital gains tax.
First, let's look at how this particular type of tax works. When you buy something, the price you pay for it is your basis. If you later sell that item for a higher amount, the difference between the sale price and your basis constitutes your capital gain. You pay a tax on that gain. That's the capital gains tax.
Let's look at an example. If you bought stock for $10 in the past and you sell that stock for $50 today, then you had a capital gain of $40. Factors affecting how much tax you'll actually pay include how long you held the asset and your overall income. In some circumstances, capital gains can be taxed at a rate up to 37%. The key takeaway is, a capital gain exists when the sale price is greater than the basis, and a tax may be due on that gain.
Effective estate planning offers a way to completely eliminate capital gains taxes. If you die while owning property, you get a step-up in basis. This means that the new basis of the asset becomes its fair market value as of your date of death. If your estate then sells that asset for that date of death value, then there is no difference between the new stepped-up basis and the amount for which the asset sold. The result? No capital gains tax.
This is why I often counsel clients against lifetime gifting of certain assets. If you gift an asset while living, then the recipient takes what is called a carryover basis. This means that the recipient assumes whatever basis you had. When the recipient then sells it for a higher price, the recipient has a capital gain that may be taxed.
By contrast, if the asset is transferred only after you die, then the recipient receives the asset with a stepped-up basis. If the recipient then sells it for the value to which it appreciated as of your date of death, then there is no capital gain and no tax to be paid.
Remember that stock example from earlier, the one that was purchased for $10 and sold for $50? Let's look at that again in this context. If I gift that stock while living, the recipient takes it with my $10 carryover basis. Upon sale for $50, the recipient has a $40 capital gain and may be subject to a capital gains tax. By contrast, if the recipient receives the stock only after I die, then the recipient takes it with a stepped-up basis and pays no capital gains tax when reselling it for the date of death value.
Taxes can be greatly affected by prudent estate planning. Be sure to get it right.
