There are many different taxes that could naturally come to your mind when you are wondering about the estate planning implications. One of them is the capital gains tax. In this post we will look at living trusts, the capital gains tax, and the step-up in basis.
Taxes on Capital Gains
If you are in possession of assets that have appreciated since you acquired them, the capital gains tax can be applicable when you realize a gain. A gain is realized when you sell an appreciated asset and pocket the profit.
The government wants to encourage long-term investing, so capital gains are divided into long-term capital gains, and short-term capital gains. If you sell the appreciated asset within a year after you purchase it, you are realizing a short-term gain. The rate on short-term capital gains is equal to your regular income tax rate.
Since the powers that be want to reward long-term investors, the long-term capital gains rate is lower. If you realize a gain more than a year after you originally purchased the asset, the rate would depend on your income level. The top rate is 20 percent, but most people would pay 15 percent.
Step-Up in Basis
When appreciated assets are inherited, the inheritor gets a step-up in basis. For capital gains purposes, the value of the appreciated assets that were inherited would be equal to their value at the time of inheritance. The person inheriting the assets would not be personally responsible for the capital gains that took place during the life of the decedent.
However, the inheritor would be responsible for future realized gains.
Revocable Living Trusts
Revocable living trusts are very popular among people who want to facilitate efficient postmortem asset transfers. If assets that have appreciated are contained within a living trust, they would get a step-up in basis after the death of the trust grantor, so the trust would not be required to pay taxes on the gains.
August Seminars Are Filling Up Quickly
If you reached this blog, you are looking for information about estate planning. We certainly make an effort to provide information through our website, and we are always updating it, so we encourage you to visit often.
At the same time, there is no substitute for real-time interactions with licensed professionals. We firmly believe in education, and we consistently offer educational opportunities in person through our seminar series.
During the month of August, we will be conducting three seminars in Minot, North Dakota. The seminars will cover myths that circulate about wills, trusts, probate, and Medicaid.
Our seminars are free to attend, but they fill up quickly, so we ask that you register as soon as possible. To obtain more details and registration information, visit our Estate Planning Seminar Schedule Page.