[ad_1]
Photograph of H.F. Davis / Getty Images
Text size
The advisers are exhausting an old tax savings strategy after the new tax law has given it considerable momentum, allowing taxpayers to eliminate huge tax obligations on appreciated assets.
The maneuver is simple: you give a valued asset, such as shares of increased value, to a parent or trusted elder, knowing that you will be left behind. At this point, the base cost increases gradually – which means that you can sell the shares immediately without having to pay tax on accrued gains since your initial purchase.
Called upstream planning because the assets initially pass from the younger generation to the old, the new tax law is key to the renewed interest in this strategy. It has doubled the amount that everyone can give to $ 11.4 million worth of assets alive or after death. The exemption can be used to protect your estate from death taxes or during your lifetime to make tax-free donations, such as appreciated assets using upstream planning.
Few taxpayers have used this strategy over the past two decades because inheritance tax exemption ranged from $ 600,000 to $ 5.49 million, which is low enough for many to want to preserve it. until their death.
"People did not want to use their inheritance tax exemption, but the whole paradigm has changed because of this new high exemption amount," says Jere Doyle, estate planning strategist at BNY Mellon Wealth. Management. "When they dubbed the exemption, everyone thought that they would delete the calculation basis at death, but that did not happen. This creates a huge opportunity for taxpayers. "
Let's take a scenario in which a $ 1 million family business owner with $ 900 earnings would like to sell the business to retire but would hesitate because of the tax on capital gains of 20% – or $ 180,000 – that he should pay.
"This technique could do away with that $ 180,000," says Steve Parrish, assistant professor of advanced planning at the American College for Financial Services. "You can continue to run the business for a while and when Dad dies, it's transferred to you without any tax liability."
Read our recent cover story: How your kids can ruin your retirement – and how to make sure they do not
There are no restrictions on the type of assets valued that can be used in upstream planning, but it's best to avoid certain assets, says Parrish. Hard-to-value assets, such as works of art and collectibles, would require valuations and their values are likely to be challenged by the IRS. This process would involve hiring valuations and potential lawyers, which could be expensive and offset potential tax savings.
As easy as this strategy seems, there are some caveats.
Make sure that the elder to whom you pass appreciated assets is also not afraid to be subject to the estate tax. "For this to work, both parties must be exempt from inheritance tax," says Parrish. "You do not want your gift to increase the inheritance rights of your parents."
If the senior dies during the first year following the receipt of your gift, the IRS will refuse to treat the operation as a death bed with no other purpose than to avoid taxes and the operation will be canceled, says Doyle.
Also be sure to trust the former to whom you are offering your goods. Parrish points out that after you have transferred your assets, you no longer control them, so your parent has the right to leave them to someone else.
"If you're the business owner trying to save $ 180,000 but your dad lives a long time, divorces and leaves the business to a person he met at the retirement home, well, that would be a shame. Said Parrish.
And there are other potential interferences with your well-established plans. If you die before your parent now owns your appreciated assets, you can not legally rely on these assets to support your spouse and children.
It is also possible that when your parent dies, other family members dispute the will and fight for the property of the property that originally belonged to you.
"It's a great tax planning tool," says Parrish. "But you have to consider the reality of working with your family."
[ad_2]
Source link