The Importance of Asset Alignment Establishing a trust is a great first step toward planning…
After decades of careful investing and strategically building your wealth, being hit with capital gains tax can feel like robbery, plain and simple. Of course, it is not—taxes have their place, after all—but this doesn’t mean you shouldn’t work to minimize their impact. Indeed, eliminating tax liabilities is as much a part of investing as picking stocks and so if you’re serious about building and protecting your assets, you should get serious about minimizing your tax burden. What follows are four simple and often-overlooked ways to do so.
1. Step-Up the Cost Basis of Your Irrevocable Trust
Irrevocable trusts are a powerful estate planning tool often used to avoid probate and reduce estate taxes (among other things). If you are the beneficiary of such a trust, it is imperative that you arrange to have the cost basis stepped up to current market value upon the original grantor’s death. Doing so means that when the assets are eventually sold, capital gains tax is calculated not based upon their original value but upon the market value at the time they were passed on which, of course, can make a big difference.
A step-up in cost basis can be accomplished by giving the current beneficiary a formula general power of appointment that is only effective to the extent it will not cause federal or state estate tax liability. An experienced estate planning attorney can walk through how to do this.
2. Move Assets to a Single Member LLC
In an ideal world, married couples would place all assets in the name of the first person to die. Doing so would mean these assets are eligible for a step-up in cost basis when they are passed on to the surviving spouse and therefore are subject to fewer capital gains tax. Predicting whose lifeline is shorter is tricky—not to mention morbid—business, however. Luckily, limited liability companies (LLCs) offer a workaround. By placing assets in an LLC owned exclusively by a spouse’s revocable living trust, these assets may be quickly moved to the surviving spouse’s revocable trust in the case of a serious accident or illness.
3. Take Advantage of Your Parents’ Unused Estate Tax Exemption
Unless your parents are worth more than $11.7 million, you can use a portion of their unused estate tax exemption to reduce your own tax burden. This works by placing assets in an irrevocable living trust designed to benefit your parents and other heirs. When your parents pass away, these assets become eligible for a step-up in cost basis that is then passed on to other beneficiaries of the trust.
4. Ensure Step-Up Flexibility Forms Part of Your Estate Plan
Trusts are versatile tools made for many different purposes which means it can be easy to overlook the need to include step-up basis flexibility if the subject is not on your mind when executing your trust. Accordingly, it is important to review previously established trusts and include this feature wherever it is missing. This is accomplished by giving trustees the power to purposely subject appreciated trust assets to estate tax for a basis increase.
By attending to all of the above, the blow of capital gains tax can be softened dramatically. To learn more and get started, do not hesitate to reach out to the Law Firm of Christopher W. Dumm either by calling 417-623-2062 or using the contact form on our website.
Contact the Estate Planning Attorneys at the Law Firm of Christopher W. Dumm