Figuring out how transferring assets via gift or inheritance will trigger capital gains taxes is an important step in a comprehensive estate plan. Factoring in tax impact is an important part of your investing strategy as well as your estate planning strategy. While estate planning attorneys focus on estate and gift taxes primarily, it is also important to weigh out capital gains scenarios and implement strategies to minimize those taxes as well.
There are several types of taxes. The government wants a cut of your income which translates into income tax. When someone leaves an inheritance higher than the current exemption amount, an estate tax is assessed. When someone gives a gift higher than the current $15,000 annual allowance and over the current lifetime exemption amount, a gift tax must be paid. And finally, when someone sells an asset and realizes a gain, the capital gains tax comes into play. A capital gain occurs when you sell an asset for more than you (or the person who gave it to you) paid for it.
Short-term capital gains rates are higher than long-term capital gains rates. An investment must be held for a full year before selling to qualify for the long-term capital gains rate. Capital gains are applied to capital assets such as stocks, bonds, jewelry, real estate, vehicles and art/collectibles. Take note that a primary residence falls under a special exclusion. The first $250,000 of the seller’s gains is excluded ($500,000 for couples filing jointly) as long as it was owned and lived in for more than 2 years.
The current (2021) tax rates for capital gains are 0%, 15% and 20% depending on your taxable income level. These rates may increase under new legislation proposed. To minimize capital gains taxes invest for the long term, use tax-deferred retirement plans as investment vehicles and employ strategy to offset losses with gains when possible. You can also move assets into living trusts for the benefit of your heirs and allow your cost basis in the asset to transfer to the beneficiary.
As you can see, estate planning requires the careful consideration of numerous factors including all types of tax implications. For assistance in creating a comprehensive estate plan, contact the experienced and knowledgeable attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufflerlegal.com
