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Tuesday, September 16, 2014

(Un)Happy-Cola Taxes

Billy and Bonnie are working on keeping taxes to a minimum for their family when they inherit Billy and Bonnie’s leftover money and property after their deaths. Although surprised when they added everything up, Billy and Bonnie are millionaires.

Sadly, they are not multi-millionaires, and it is unlikely they will ever have over $2 million. Happily, though, that means they do not have to worry about their family paying estate taxes to Illinois or the U.S. government after their deaths.

Billy wants to save any unnecessary income taxes for his family. And there are certain taxes you can ‘avoid’ by dying. Since he knows he must die eventually, he sees no problem in planning to maximize the advantage for his family.

To understand it, we must calculate the taxes he would pay if he sold all of his Happy-Cola stock shares that he bought in the 1950s for $1,000. Awesomely, after stock splits and price increases, they are now worth about $101,000.

If Billy sells, he will be taxed on $100,000 of profit – capital gain in tax lingo. His capital gains tax bill would be at least $20,000, 15% to the feds and 5% to Illinois.

If he leaves the stock to his son after death, Junior would be able to completely avoid the capital gains tax because of ‘stepped up basis’ rules.

Stepped up basis is not easy to explain in a sentence or two, so will try to do that with our whole column next week. For advice about minimizing estate and related taxes for your family after your death, please call us for an estate planning appointment at (815) 436-1996.

©2014 Gruber Law Office, Ltd.


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