The potential for higher tax rates, coupled with markets near or at all-time highs, are keeping investors and their advisers on alert. While investors save to cover future spending, their advisers are helping to evaluate wealth-transfer opportunities. A tailored strategy can integrate gifts to both individuals and charity as part of a lifetime or legacy plan.
Even those who are saving for retirement may benefit from taking advantage of lower tax rates and getting in front of potential tax changes on the horizon.
With no shortage of available charitable solutions, evaluating a plan for assets earmarked for spending as well as charity is beneficial. Identifying appropriate alternatives to meet both goals while managing taxes can be challenging. An effective strategy will consider the tax attributes of both currently taxable and tax-deferred accounts and pair solutions to deliver potential tax savings and other advantages.
Planning for Taxable Assets
Long-term investors in today’s markets may find themselves holding securities that have appreciated substantially. Effectively managing the tax consequences of those assets requires an understanding of potential capital gains taxes when selling or transferring appreciated assets. If you transferred highly appreciated shares to a loved one during your lifetime, the recipient generally could carry over the cost basis of the appreciated securities and only recognize the gain when securities are sold. If the recipient is an adult child or other individual in a low tax bracket, a gift of appreciated securities you’ve held over one year from time of purchase can allow the recipient to be taxed at a lower capital gains rate.
For example, if an investor who would be taxed at a 20% capital gains rate transfers the appreciated asset to a child in a tax bracket where their capital gains are taxed at a 0% or 15% rate, the family can benefit from lower taxes. Recipients in states where state capital gains rates are lower or non-existent (such as Florida or Texas) may also end up paying less tax.
Passing down appreciated assets after death can offer an even better tax savings for your family. Those not making lifetime transfers to individuals, or who have no reason to sell appreciated assets for diversification or to adjust their asset allocation — provided they are willing to accept the investment risk — may want to consider holding those appreciated securities. At death, the assets allow recipients to receive a step-up in cost basis. The step-up allows the recipient to reset the cost basis of an appreciated asset to fair market value established at death of the account owner.
Conversely, any assets held at a loss are better if sold during the life of the account owner, as they can be used to offset gains …….