An important part of estate planning involves tax planning – arranging your affairs to save the greatest amount of taxes while doing what you want to do. Unfortunately, taxes can be complicated and come in many different varieties – estate or death taxes, income taxes, capital gains taxes, generation skipping taxes, and gift taxes, to name a few. Lawyers generally need special tax training beyond the typical legal training to weave through these tax laws and create a plan that also works well with your tax preparer.
Rowen N. Young is one of the few lawyers in Hawaii with an L.L.M. in taxation. Come in for a free consultation on tax planning. Call (808) 944-1554 to make an appointment.
Specific Taxes and How You Avoid Them:
Estate Taxes
The estate tax, a type of death tax, is a tax on transferring or receiving property at the death of the property’s owner. This tax applies to property transferred to new owners by a will or by an intestate transfer. Because of the nature of this tax, some refer to this as the inheritance tax.
Avoiding estate taxes, if needed, are possible with the right planning – estate taxes generally do not apply to transfers to spouses or charities. More importantly, a set amount updated every year is exempt from this tax, meaning up to a set amount can be given away by an individual during their lifetime before estate taxes are paid. For 2016, this amount is $5.45 million per person, for their lifetime.
Gift Taxes
The gift tax is the other side of the coin to the estate tax – it is a tax on transferring or receiving property during a person’s life (while you are still alive). When you give a gift, something given where nothing is received in return, it may be accompanied by gift taxes. Even if the gift is not cash, or not even tangible, gift taxes may apply. The gift tax is usually paid by the gift giver, also called the donor. Gift taxes may also apply in part for deeply discounted or substantially lower exchanges.
Gift taxes can be avoided as long as the gift amount is under the yearly limits per person, or generally if the gift given is not complete (meaning they still retain an interest or some control over the property). The annual limit for 2015 is $14,000 per person, up to the lifetime exemption of $5.45 million per person.
The Generation Skipping Transfer Tax (GSTT)
The GSTT tax is a tax on gifts and transfers in trust to or for the benefit of 1) unrelated persons who are more than 37.5 years younger than the donor, or 2) related persons who are more than one generation younger than the donor (like grandchildren).
The GSTT tax can be avoided in different ways – firstly, a lifetime exemption exists for each person for up to a specific amount ($5.45 million in 2016); second, annual gifts under the gift tax limit can be given to grandchildren without GSTT ($14,000 per person per year); or third, a situation may be created that has the same effect as a generation skipping transfer using a deceased parent to whom the gift was supposed to go to (but that person has already passed away at the time of the gift).
Capital Gains Taxes
Capital Gains Tax is a tax on profits resulting from the sale of a capital asset like real estate, stocks, and bonds. Capital gains may also refer to investment income. This tax is applied to the gain, or difference between the higher sell price and the lower purchase price. It can also be classified as a long term or short term capital gain. Short term capital gains are taxed at your ordinary income tax rate, and apply to investments held and sold for less than a year. Long term capital gains are taxed at a lower rate than short term gains, and apply to investments held and sold after more than one year. When a taxable gain results, the asset’s cost basis (purchase price) is subtracted from the amount realized from the sale (sell price). The cost basis is also adjusted for certain fees and depreciation. Most people will pay the largest capital gains tax on the asset that appreciates the most – on the sale of their home. For example, if you purchased your home many years ago for $100,000 and today is it worth $500,000, you will pay capital gains tax on $400,000.
There are a number of estate planning methods to help reduce or eliminate capital gains taxes, especially on the sale of your house. One of the most used methods involves using a step-up in basis. The step-up in basis, in a nutshell, increases the basis (the original purchase price) to the current fair market value at the time the decedent dies. In the previous example, if your basis in your house was $100,000 and you passed away today, those you decided to leave your house to will receive it with a basis of today’s value, or $500,000, meaning if they chose to sell the house today, the capital gains tax would be virtually eliminated.
Call us to set up a free consultation to see if we can help you with your tax and estate planning needs!