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Focus Shifting to Income Taxes in Estate Planning

10.05.15 | T&E Chat

Estate planning strategies have typically focused on minimizing federal gift and estate taxes, which can be accomplished by giving away assets during your lifetime to reduce your taxable estate. Recently, that focus has shifted and income taxes have taken on increased importance.

Since 2001, the federal exemption has grown from $675,000 to $5.43 million, with the top estate tax rate decreasing from 55% to 40%. At the same time, the top individual income tax rate has increased to 39.6%— nearly as high as the top estate tax rate. These changes mean fewer people need to worry about their estate tax liability.

Holding assets until you die rather than giving them away during your lifetime may be advantageous. If you give away an appreciated asset, the recipient takes over your tax basis in the asset, which will trigger capital gains taxes if he or she turns around and sells it. An alternative strategy would be to hold on to an appreciated asset until your death. When such an asset is inherited, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. What does this mean for you? Holding appreciating assets until death can save significant income taxes.

Questions? If you need help determining whether it’s better to focus on reducing estate taxes or income taxes, please contact us.

Marco Svagna, a tax partner at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on estate and income tax issues, succession and financial planning, and other matters relating to the preservation of wealth.