Tuesday, September 30, 2014

Why Not Give Now?

Billy and Bonnie are working on minimizing future taxes for their family.  Last week, we wrote about how stepped-up basis for their son, Junior, on the Happy-Cola stock they plan to leave for him after Billy’s death would save capital gains tax.

In short, because Billy originally bought those shares in the 1950s when they were much cheaper, Billy would have to pay about $20,000 in capital gains taxes if he sold at today’s prices.  But Junior would receive ‘stepped up basis’ by being given credit for ‘buying’ the stock for its value of the date Billy died.  That would eliminate the entire $20,000 tax. 

Billy asks, “Why not give it to Junior now?”  He and Bonnie would like to enjoy Junior’s surprise at receiving it as a birthday present and hear about his fun investing it going forward. 

The problem is that if Billy gave it to Junior now, before Billy’s death, Junior will receive what is called “carry-over basis” instead.  That would mean that Junior’s basis in the stock would be Billy’s old basis (the original purchase price) and so have to pay capital gains tax just the same as Billy. 

Junior would also have to show the IRS what Billy paid for the stock in order to avoid paying an extra $200 of tax.  Billy is a wonderful dad, but his record keeping a bit less so…

For advice about taking advantage of planning opportunities for your family’s future, please call us for an estate planning appointment at (815) 436-1996. 

©2014 Gruber Law Office, Ltd.

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