Navigating the Tradeoff Between Capital Gains and Estate Taxes: A Guide for Trust Makers
The focus of this article is on the importance of considering capital gains taxes in addition to estate taxes when planning trusts, LLCs, and estate planning strategies. While many people fear the 40% federal estate tax rate, it only applies to amounts over the federal exemption, and only a few states have a state-level estate tax. On the other hand, capital gains taxes can be costly, with a combined federal and state-level tax rate potentially reaching 30%. Trust makers need to carefully consider their approach to trust planning to avoid inadvertently subjecting their beneficiaries to higher capital gains taxes.
It is crucial for trust makers to understand the implications of making a completed gift into an irrevocable trust, as it may disqualify beneficiaries from receiving a step-up in basis upon the trust maker’s death. By giving up control and powers over the trust property, a trust maker can make a completed gift and potentially minimize transfer taxes. However, this decision must be made with consideration of current transfer taxes, built-in gains for capital gains tax purposes, and potential future appreciation of trust assets.
It is also important to note that making a completed gift to a trust that is exempt from estate tax will result in the trust property not being eligible for a step-up in basis, potentially leading to higher capital gains taxes for beneficiaries. Trust makers must carefully weigh the trade-off between capital gains taxes and estate taxes when deciding how to structure their trusts and estate planning strategies.
Overall, understanding the interaction between capital gains taxes, estate taxes, and trust planning is essential for ensuring a tax-efficient and effective estate plan. By carefully considering these factors and seeking advice from financial and legal professionals, trust makers can make informed decisions that will benefit both themselves and their beneficiaries in the long run.