Capital Gains Tax and Your Estate Plan: What You Need to Know

Estate planning contains several components – one of them being factoring in taxes. Below is a breakdown of what is capital gains tax and how it impacts your estate plan.

What is Capital Gains Tax?

Capital gains tax refers to the taxes you will have to pay on investments when you sell them. Capital gains tax is calculated based on how much the asset has appreciated, or gone up in value, during the time you have owned it.

Capital gains tax is determined using the following method: Total sale price of the asset minus what you originally paid for it. The tax will then be applied based on the sum of those numbers.

Capital gains tax can apply to many different assets you own, including, but not limited to, the following:

  • Stocks
  • Bonds
  • Real Estate
  • Precious metals

Is it Possible to Avoid Capital Gains Tax in Estate Planning?

The answer to the above question is: yes. It is possible, with careful planning, to avoid or reduce some of the capital gains tax when creating your estate plan. The following is a list and subsequent descriptions of how you can do this:

  • Review your assets
  • Create a trust

Review your assets

The first step to assess your potential capital gains tax and the subsequent effect on your estate plan is to assess what assets you have. As referenced above, assets that are subject to capital gains tax can include stocks, bonds, real estate and precious metals.

By carefully planning, there are some strategies that can help reduce the capital gains tax. An example of one such strategy is passing down property to an heir. While you can gift your property to an heir before passing away, having them inherit it instead can reduce the capital gains tax on the property. Say you purchased a home for $300,000 and the value at the time you pass the home on to whomever you want to have it is $600,000. If your heir then goes to sell the home and sells it for $650,000, the capital gains tax will only apply to the $50,000 gain, not the gain from the time you purchased the property.

Create a trust

Another option is to create a trust. Certain types of trusts come along with tax benefits. By putting your assets in a trust, those assets may not be subject to capital gains tax, and you may reduce the estate tax amount you face as well.

What are Short-term and Long-term Capital Gains? What is the Difference Between the Two?

Capital gains can be broken down into two categories: short-term capital gains and long-term capital gains. Short-term capital gains will be taxed on assets you own for one year or less and then sell. Assets owned longer than that are deemed as long-term capital gains.

For any questions regarding the impacts of capital gains tax on your estate plan, or any of your other estate planning needs, we are here to help. Contact us today to learn more about how we can work with you.

For more information regarding various estate planning and elder law topics, view our resources page, where you will be able to find previous blog articles, newsletters and our informative webinar series.

Image by Mohamed Hassan from Pixabay

About the Author

Alyssa Marie Monteleon, Esq.

Alyssa Marie Monteleon is an elder law and estate planning attorney at the Monteleon Law Group, PLLC with offices in New York and Virginia. For more information, please visit or call (914) 840-2529.

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