Article
High on the priority list for many families is minimizing taxes across generations. This strategy often requires coordinating with an expert over multiple years to develop and implement a plan to save in taxes for the whole family system. For many wealthy families, coordinating planning strategies across generational lines can have a meaningful impact on the family system’s balance sheet.
Consider the following example of a family patriarch making annual gifts to his young adult granddaughter who was beginning her first job as a teacher:
Back when his granddaughter was 7 years old, the father opened an investment account in her name and transferred a relatively small (but not inconsequential) amount of stock into the account. When the little girl grew up and flew the nest, she would have some money to get her started in life.
Fast forward 14 years: the young girl has grown into a young woman and has begun her career. Meanwhile, the account has grown to nearly three times its original value! She now stands with access to a healthy starter fund with which to face the challenges of adulthood.
Here is where smart tax planning comes in.
The young lady followed her passion and is now a teacher and her income is within the threshold to be able to pay the 0% Federal Capital Gains tax for the next couple of years – 14 years’ worth of capital gains with no taxes due to the IRS! What a tremendous gift the family patriarch was able to give his granddaughter!
If this strategy sounds appealing, here are some important points to consider:
- If you sell an asset that has increased in value, the IRS requires that you report the sale as a capital gain.
- When transferring assets to others, transfer assets that are easily sold such as stocks, mutual funds, Exchange Traded Funds and only those assets that you have held longer than one year.
- For the greatest tax avoidance, gift assets that have appreciated the most.
- If you need to rebalance your investment portfolio, consider giving overweight positions to bring your portfolio back into balance.
- The capital gains tax rate is based on taxable income, which is calculated after all your deductions, whether standard or itemized. (A married couple making $100,000 of gross income would likely benefit from this strategy.)
- Keep in mind that while you may pay 0% at the federal level, many states will levy their own taxes on the capital gains.
A savvy tax planning strategy is one of the many ways you can keep more money in the family, and give less to the IRS. Talk to your financial advisor to see if any of these strategies will work for you and your family.
