Questions about taxation are naturally going to arise when you are planning your estate, and they would also come into your mind if you are going to be receiving an inheritance someday. One of these questions involves appreciated assets.
There is a tax called the capital gains tax. This tax comes into play if you are in possession of assets that have appreciated since you acquired them. However, you do not have to pay taxes on an ongoing basis as the assets appreciate. You are only required to pay the tax if you realize a gain.
How do you realize a gain? You realize a gain when you sell the asset and take possession of the appreciation.
There are two different types of capital gains: short-term capital gains, and long-term capital gains. A gain would be a short-term capital gain if the asset that produced the gain was sold within one year of the original purchase of the asset.
The rate on short-term capital gains is equal to your regular income tax rate.
As you may guess based on the above, a long-term capital gain is a gain that is realized more than a year after the original acquisition of the assets. The government would like people to hold on to their assets for extended periods of time, because this contributes to long-term economic stability. To provide an incentive, the rate on long-term capital gains is lower than the rate on short-term gains.
The highest income earners pay a 20 percent long-term capital gains rate, and the majority of people pay 15 percent.
Now that we have provided an overview with regard to the capital gains tax in general, we can look at the estate planning implications. Let’s say that your grandfather purchased shares of stock 30 years before he passed away. He paid $10 per share when he originally purchased the stock. By the time of his death, the shares were worth $200 each. Using this hypothetical scenario, we will say that you inherited 200 shares.
You would not be required to pay capital gains tax on the appreciation that took place during the life of your grandfather, because you would get a step-up in basis. For capital gains purposes, the value of the shares that you inherited would be equal to their value at the time of inheritance.
If you chose to hold onto the stock, and it continued to appreciate, you would be looking at capital gains responsibility if and when you realize the gains.
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Our firm can help if you have questions about how taxation can impact your estate plan. We offer free consultations, and you can send us a message through this page to set up an appointment: Grande Forks ND Estate Planning Attorneys.