1. The Basics of Basis. Cost basis is the original acquisition value of an asset for tax purposes (usually the purchase price or the inherited price), adjusted for stock splits, dividends and return of capital distributions. This original value is used to determine the capital gain - and becomes the difference between the asset's cost basis and the current market value.
2. Striking while the Step-Up’s Hot. A step-up in basis is the readjustment of the value of an appreciated asset for tax purposes. With a step-up in basis, the value of the asset is determined to be the higher market value of the asset at the time of transfer, not the value at which the original party purchased the asset.
3. Transfer Up to Get Capital Gains Down. Transferring an asset “upstream” to your parents or a trust for the benefit of your parents will enable the asset to get a step–up in basis upon the parents’ death.
4. Shifting Gears with the Shifting Landscape. Assets previously gifted by clients directly to family members or in trust for estate tax minimization purposes may have appreciated significantly, causing unintended capital gains tax consequences for their loved ones.
5. Speeding up the Process when You Want to Sell Now. For older clients who wish to sell highly appreciated assets in the near-term, several trust strategies can provide the benefit of a step-up in basis upon the passing of the first spouse.
6. Tinkering with the Taxation of Capital Gains in a Trust. For non-grantor trusts, long-term capital gains are not included in distributable net income (DNI) and are taxed at the top marginal rate.
7. Spending Time to Save Money. You may be able to exclude some or all of the gain that is taxed on the sale of your principal residence. The tax code permits owners of homes to exclude up to $250,000 of capital gain ($500,000 for a married couple) if they have owned and lived in their home for at least two years out of the five years before a sale.
8. The IRS’s Gift for Giving Back. When gifts of appreciated long-term assets are made to charity, no capital gains taxes are owed, because the securities are donated, not sold.
9. The 411 on a 1031 Exchange. A 1031 Exchange is a way to delay capital gains taxation by rolling the sale proceeds of the original asset into a new investment in a like-kind asset.
10. Consider the Tax-Free Possibilities. Two special savings accounts are given a pass by the IRS in terms of taxation.
“Most estate planning attorneys have spent the first half of their careers getting assets out of their clients’ estates, but now many will spend the second half of their careers getting assets back into select clients’ estates,” commented McManus.
McManus explained, “When assets are included in an estate, they are subject to estate tax, but the assets enjoy a step-up in basis for income-tax purposes. Gains tax can then be avoided. However, if there is no estate tax because the gross estate assets are below the estate tax exemption amount, then it may make sense to keep assets inside the estate.”
For professional advice on navigating the current tax environment, call McManus & Associates at 908-898-0100. For more information on this highly acclaimed firm, go to www.mcmanuslegal.com.
About McManus & Associates
Nearly 25 years ago, McManus & Associates was founded in the Tri-State Area to deliver the highest quality estate planning services that the largest firms promise with the more intimate, personalized relationships that a boutique firm can offer. Since that time, some of the most prominent families in finance, media, academia and medicine — both domestic and international — have relied on the firm to serve as their advisor in wealth and family mission planning.