Gainesville Estate and Trust Tax Attorney
Avoiding Estate Taxes
Estate taxes are perhaps the most reviled form of taxation in the United States. Unfortunately, when it applies, it is also one of the most costly. The federal estate tax rate is currently 40% of assets above the exemption amount. And your taxable estate typically includes real estate, retirements accounts, and the death payout of life insurance policies. To give an example, imagine that your life insurance payout increases your asset levels to just $500,000 over the exemption amount. That would mean that your estate has to pay $200,000 in estate taxes.
So what is this exemption amount going to be when you die? That is a surprisingly difficult question to answer. The estate tax exemption is a political number, and it changes wildly over the years. In the year 2000, the estate tax exemption was $675,000. Now it’s $11.58 million. But the current law requires the exemption to be drastically lowered in 2025. In the meantime, congress could pass new legislation changing things entirely. The unfortunate reality is that you cannot know what the estate tax exemption is going to be when you die. But you can take steps to safeguard your estate just in case.
The easiest estate tax solution is to move assets outside of your taxable estate. Many people that have potential estate tax problems can resolve those problems by moving their life insurance policies into an irrevocable life insurance trust (ILIT). When properly set up and managed, an ILIT avoids the estate tax by changing the owner of your life insurance policy. However, this generally has to be done at least three years before your death for it to work.
Another option is the use of the marital deduction and portability. This is a way to combine the exemption of amounts of spouses. It can also eliminate any taxes when the first spouse dies, regardless of how big the estate is. This kind of plan is sometimes used in combination with a Qualified Terminable Interest Trust, but that is not always the case.
Getting a Step-Up in Basis
An important concept in taxation is the “cost basis” of an item. The cost basis of an item matters because it determines how much you have to pay in taxes if your sell that item. Usually, your cost basis is the amount you paid for an item.
Let’s look at an example. If you paid $100 for a share of stock, your basis in that share of stock is $100 because that’s how much you paid for it. Now let’s say you sell that same share of stock for $300 a year later. That means you made $200 in profit from the sale of stock! Unfortunately, it also means that you have to pay taxes on $200. That $200 is called “taxable gain,” which means you have to pay taxes on that income. The taxable gain is calculated by taking the total sell price ($300) and subtracting out the cost basis ($100). So $300 - $100 = $200 in taxable gain. But what if you could increase the cost basis to $300? Well, if you did that, then there would be no more taxable gain and you would owe no taxes on the sale of stock! That’s because $300 - $300 = $0. Therefore, if you could somehow increase an item’s basis, you could lower the amount of taxes paid when the item is sold.
Thankfully, there is a legal way to increase cost basis, and we call it a “step-up” in basis. The step-up occurs when an item passes through a taxable estate to a beneficiary. The step-up in basis can allow incredible tax savings. If you own real estate or stock, you should be thinking about how to get a step-up in basis for your family. The savings can be significant, especially if you have owned the real estate or stock for years.
The step-up in basis is a way to eliminate capital gains taxes for the people you leave assets too. Think about it this way. If you paid $10 for a share of stock in 2002 and sold it today for $510, you would have to pay taxes on the $500 in gains. But if you left that same share of stock to your son when you died, your son could sell the stock for $510 and pay no taxes on the gain! That is because the son gets a step-up in basis from $10 to $510. The IRS treats the stock like the son purchased it for $510, even though he did not purchase it at all.
This becomes extremely important when you are dealing with high-value assets like real estate or a stock portfolio. Some families have owned a house for decades and watched the value go up by six figures over the years. As you can imagine, the tax savings can be tremendous when a step-up in basis is properly utilized.
Unfortunately, some estate planners do not properly understand the rules pertaining to step-up in basis. And it is possible to accidentally give up all the tax savings! Gifts, for example, do not get a step up in basis. And transfers in something called a “bypass trust” get only one step-up in basis when you could have gotten a second step-up! This is one of the reasons that it is important to talk to an estate planning attorney that understands the tax implications of your actions.
How to Find an Estate and Trust Tax Attorney in Gainesville, FL
If you are looking for an estate tax attorney or trust tax attorney, you might consider searching for the phrase “estate tax attorney near me” in a search engine. You should look for an attorney that focusses on estates, trusts, and taxation as primary practice areas. These are complex areas of law, and it can be helpful to find an attorney with deep knowledge in those subjects.
Blakely Moore is an estate and trust tax lawyer practicing in the Millhopper area. He graduated from UF Law, where he studied under some of the most respected tax law academics alive. If you live in or near Alachua County and want to make sure your estate plan saves taxes, schedule a free consultation today.