Capital gains tax proposal might make trusts more popular

On behalf of Scaringi Law posted in Estate Planning on Saturday, February 7, 2015.

Although estate planning is very important, it's not every year that the subject makes its way into a State of the Union address.

Yet the 2015 speech given by President Obama last month touched on that very subject. The President hinted that a proposal to change how certain inherited assets are taxed might be in the works.

Specifically, President Obama suggested an end to the current step-up approach used when calculating capital gains taxes. Under current law, an asset's basis, or value, is set according to its fair market price at the date of inheritance. That's referred to as a step-up because the asset's value when the decedent obtained it is typically much lower that its present market value (especially if it was purchased many years before the decedent's death).

For assets like securities, this approach offers a significant savings in capital gains tax that can be passed on to future generations. Indeed, capital gains tax on securities is usually triggered only when the shares are sold.

If Congress agrees with President Obama's proposal, capital gains taxes might instead be calculated based on the decedent's basis. The rationale behind this proposal might be to require the wealthiest Americans to pay more for inherited assets. But would a new law actually achieve that objective?

An attorney that focuses on estate planning knows that there are other strategies for minimizing taxes. Transferring assets to an irrevocable trust might be one way to avoid a transfer tax. Said another way, the trust would be the owner of the assets, so the decedent's passing wouldn't trigger a taxable event. To learn more, check out our firm's website page on wills and trusts.

Source: Forbes, "Obama Attack On 'Trust Fund Loophole' Could Increase Tax Advantage Of Trusts," Janet Novack, Jan. 20, 2015

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