The interplay of capital gains and estate planning

Anyone whose estate plan was done years ago might want to review it in light of changes to federal tax laws. Historically, the focus of estate planning was to have an asset distribution aimed at avoiding federal estate taxes, but an increase in the estate tax exemption to $5.45 million for individuals in 2016 makes it likely that New Jersey taxpayers might be more concerned about other tax implications besides estate taxes.

The transfer of assets into a revocable trust or an irrevocable trust might have made good financial sense when the primary concern was estate taxes. Complicated estate planning that avoided estate taxes on the death of the owner might not have been concerned with the tax liability on any capital gains, but the focus of concern might now have shifted.

An asset is often subject to taxes on any capital gain that is realized upon its sale. For example, if stock is purchased for $150,000, and is later sold for $200,000, taxes will be owed on the $50,000 gain. If the owner transferred the stock as a gift to a relative who then sold it, the relative's basis or starting point for determining the gain for income tax purposes would still be $150,000. Keeping the stock in the name of the owner and allowing it to pass through a will at death would result in the heirs getting the property with a basis equal to the market value at the time of the owner's death.

Federal and state tax laws can be complicated. Individuals who are concerned about minimizing their tax liability should seek estate planning assistance from an attorney who is knowledgeable about the various strategies that might be available.

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