J. Kelly Kennedy, Attorney/CPA, PLLC

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Attorney and CPA

How do capital gains taxes affect inheritances?

When someone profits from selling an asset or investment that they own, that person is usually responsible for paying a capital gains tax on the profit. The Internal Revenue Service divides capital gains in long-term and short-term categories, with different applicable tax rates applying to each category. In addition, the capital gains tax rate can fluctuate based on the person's ordinary income tax rate.

Many people in Polk County understand capital gains taxes and are accustomed to reporting and paying them each year. However, they may not be aware of how capital gains can factor into an estate plan.

When a person sets up their estate plan, they typically seek to maximize the value of the estate and assets that they are leaving to their children or other beneficiaries. Part of maximizing this value can come in the form of minimizing inheritance taxes. Although Florida does not impose an estate tax, the decedent's heirs may still have to be concerned about federal estate taxes. However, in general, even the federal estate tax does not apply to estates that are worth $5.43 million or less.

Assuming that the federal estate tax will not apply to a person's estate, that person may want to structure their estate plan in a way that minimizes the capital gains tax burden on their estate.

One way of doing this is for the person to pass down those assets that have greatly appreciated in value during their lifetime. The reason behind this is that the cost basis of those assets will end up being the market value of the assets on the day that the decedent dies. By contrast, if the person sells those assets during their lifetime, the cost basis will be the price at which the person originally bought the asset, thus making for a much larger capital gains tax liability.

This is just one of the ways that capital gains can factor into an estate plan. This area of inheritance and estate planning law has many little nuances. Accordingly, a person may want to rely on an experienced estate planning attorney to understand all of the implications of any given estate planning choice.

Source: The Wall Street Journal, "The New Rules of Estate Planning," Laura Saunders, Oct. 28, 2014

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