By: Ed Brown, Esq.
When planning your estate or thinking about gifting assets during your lifetime, it’s important to understand how basis and capital gains taxes work—and how smart planning can help minimize your tax exposure.
Typically, assets included in your taxable estate will receive a step-up in basis to their fair market value on the date of your death. This means that your heirs could sell those assets shortly after your passing with little to no capital gains tax.
However, assets you gift during your lifetime generally do not receive this step-up. Instead, the recipient inherits your original cost basis—the value you paid when you acquired the asset (less any depreciation you incurred on such asset). If those assets have appreciated significantly over time, this can result in a substantial capital gains tax liability when the assets are eventually sold.
Fortunately, there are several strategies to potentially reduce or defer capital gains taxes on gifted assets, not just during your lifetime, but also at your death and even again at the death of your descendants. For example, some planning techniques may allow for the basis of both spouses’ trust assets to be stepped up at the death of the first spouse-to-die, even if you don’t live in a community property state. This could enable the surviving spouse to sell trust assets with little to no capital gains tax. This is accomplished by, for example, modifying your existing garden-variety revocable trusts so that they effective give the first-to-die spouse broad powers over all or a fraction of both spouses’ assets so that all such assets get a new stepped-up basis, but carefully crafted to avoid unnecessary estate taxes upon the first-to-die spouse’s death. Also, the use of community property trusts can be explored, which are allowed in a number of states. Another design could involve a sale of assets to a completed gift trust that grants an elderly relative (who does not have estate tax concerns) broad (but controlled) powers of the sold assets. The goal there is for the sold assets to achieve a new stepped-up tax basis at the time of the elderly beneficiary’s death.
That said, not all strategies are created equal, and it’s crucial to avoid those that could raise red flags with the IRS. Also, there are risks with whether the above-mentioned strategies will be upheld if challenged (however, there are ways to enhance the likelihood of a design being successful).
Each year, the IRS publishes its “Dirty Dozen” list, which highlights abusive tax schemes and transactions that you should avoid. Some examples include:
Monetized installment sales;
Transactions involving Malta pension plans;
Abusive charitable trust structures; and
Trusts marketed under names like “643,” “pure,” or “complex spendthrift” trusts, which claim to avoid capital gains taxes altogether.
These arrangements may be promoted as a way to gain significant tax savings, but they could lead to audits, penalties, and worse if they fall outside of IRS guidelines.
Bottom line? Proper planning can offer powerful tax benefits—but it must be done responsibly and legally.
About Greenspoon Marder Greenspoon Marder LLP is a full-service law firm with over 225 attorneys and more than 20 office locations across the United States. With operations from Miami to New York and from Denver to Los Angeles, our firm attracts some of the nation’s top talent in key markets and innovation hubs. Our core practice areas include Real Estate, Litigation, and Transactional Services, complemented by the capabilities of a full-service firm. Greenspoon Marder has maintained a spot on The American Lawyer’s Am Law 200 as one of the top law firms in the U.S. since 2015, and our goal is to provide exceptional client service by developing a thorough understanding of each client’s business needs and objectives in order to provide strategic, cost-effective solutions.
MEDIA CONTACT
Natalie Villanueva, Director of Marketingnatalie.villanueva@gmlaw.com
This Greenspoon Marder LLP Client Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice nor a solicitation of any type. Please contact the author(s) or your Greenspoon Marder LLP contact if you have any questions regarding the currency of this information. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer’s legal qualifications and experience.
