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Estate Planning: Five Ways to Keep Capital Gains Taxes Low

May 03, 2016

Estate planning as you know it has changed, making capital gains taxes higher for many taxpayers—learn how you can keep these taxes low.

Capital gains taxes, or taxes levied on profits from the sale of property or an investment, are changing the way people think about traditional estate planning. Long-term capital gains tax rates now range from 25-33% and the current federal estate tax exemption is at $5.45 million, which means that many Americans may no longer be exposed to federal estate taxes, and income and capital gains taxes will in turn become more prominent.

Best ways to keep capital gains taxes down

So, how can you make sure capital gains taxes remain manageable?

  1. Think about un-doing a trust. Putting assets that were once gifted into a trust back into an estate can help avoid capital gains taxes.
  2. Consider ‘upstream gifting.’ This unique practice involves transferring an asset up the generational chain to an older family member such as a parent. You can also set a trust up for an older relative with this tactic. An asset transferred to an older relative allows the asset to achieve a step-up in basis at the time of the relative’s death because even though it is considered a gift (gifts have no “step-up”), it is also considered an inherited asset which do receive a step up upon death.
  3. Joint-Exempt Step-Up Trust (JEST). You could use this special kind of trust if you (or your spouse) is in possession of highly-appreciated assets. A JEST allows a surviving spouse to sell an appreciated asset without being tacked with any capital gains tax after the first spouse’s death. Using this tactic allows the spouse to benefit from a step-up in basis to current market value upon the death of the first spouse. Normally, assets upon death of a spouse are only allowed a step-up in basis of 50% of the asset.
  4. Avail yourself of the home sale gain exclusion. This exclusion permits an exclusion of up to $250,000 of capital gain per spouse when a couple sells their home. The only stipulation is that you and your spouse must have lived in the home you’re selling for two of the last five years before the sale.
  5. Use a 1031 exchange if you have a real estate investment or artwork you bought as an investment. You can delay capital gains taxation another way by using a 1031 exchange which rolls over the gain from an original asset in to a new, similar piece of property or artwork. In this “like kind” swap of assets, the newly owned asset is assigned the cost basis of the original asset. The gain on the sale of the original asset will be deferred until you ultimately dispose of the new asset.

Ensuring that capital gains taxes stay low depends on your skillful, timely, and strategic planning. Taxpayers of all kinds can benefit from availing themselves of these strategies—start planning now!
Contact any member of our Private Client Services Team for further guidance.

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