(1) The Step-Up. Appreciated assets you own get a step up in basis when you die. This is best explained with an example. Let's say Dad bought a share of stock years ago for $10. The share of stock is now worth $60. If Dad sells the stock while he is alive, he will pay capital gains tax on the $50 of capital gain. But if Dad holds on to the stock and his heirs inherit it through his WIll or revocable living trust, then the heirs or beneficiaries will benefit from the step up in basis. The new basis will be the value of the share on the date of Dad's death (let's say $60). So if the heirs then sell it for $60, there will be no capital gains tax to pay. This can be a good thing.
(2) The Carry-Over in Basis. Now let's say that before Dad dies, he gives or donates that share to Daughter. Because it was a donation, Daughter gets a carry over basis - whatever Dad's basis was in the stock. Daughter's basis is $10. If Daughter sells the share, she will incur significant capital gains tax. This is why many older people who own assets that have significant untaxed appreciation often hold on to those assets and let the children inherit them at the stepped-up basis.
(3) Home Exclusion. Single people can exempt the first $250,000 of gain from the sale of their residence from capital gains tax. Married couples can exempt the first $500,000 of gain. Rules exist regarding how long you must reside in your home and you must, of course, follow these rules. Example: Couple buys home for $400,000. Couple can sell home for up to $900,000 and incur no capital gains tax.
(4) Section 1031 Exchange. This works well for real estate investors. If you follow the specific rules, you can sell appreciated property and invest the proceeds into "like-kind property." You will not have to pay capital gains tax on the gain from the sale of the first property. Your basis moves to the second property. Perhaps you will pass away owning the second property and your heirs will benefit from the step-up at that time.
(5) Double Step Up in Basis. This one is relatively new, but important nonetheless. Old school estate planning required that you leave usufruct of your estate to your spouse, or that you left your estate in an irrevocable trust for your spouse. This kept the assets of the first spouse to die from being lumped into the estate of the second spouse to die. Now, estate tax is not an issue unless you own more than $11.2 million. Old school estate planning prevented the assets of the first spouse to die from getting another step up when the surviving spouse dies. Arranging your estate planning program to achieve the double step-up can save a ton in taxes. A high-quality estate attorney will be able to structure your estate to get this "double step-up" for the benefit of your heirs.
This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.
Paul Rabalais
Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450
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By: America's Estate Planning Lawyers
Title: 5 Estate Planning Aspects of Avoiding Capital Gains Tax
Sourced From: www.youtube.com/watch?v=UJ2a55kJTcc
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