Financial planning should be looked at as a long-term, holistic process. When you first embark on a career path, you want to develop some savings with certain financial goals in mind. A home purchase may be the first step, and the short of this, you want to make sure that you have a nest egg to draw from on a rainy day.
As your life evolves over the years, you may get married and have children. At that point, financial planning will take on a different complexion as you look ahead toward the educational expenses that you will have when your children enter college. Your retirement will also be an important consideration as you start to get older.
Then, there is the matter of your legacy. Most people want to enjoy their retirement years to the fullest with the knowledge that they will be able to pass along a suitable legacy to their loved ones. When you start to think about your estate, you should definitely consider potential taxation.
Estate Planning & Taxation
There are many different taxes to take into account, and you may be surprised when you hear some of the facts, because there are some significant positives.
First off, an inheritance is not considered to be taxable income by the Internal Revenue Service. Secondly, if you were to inherit appreciated assets, you would get a step-up in basis.
For capital gains tax purposes, the value of the assets would be equal to their value when you acquired them. You would not be responsible for appreciation that took place during the life of the decedent.
The step-up in basis is a very significant thing right now. The stock market has been going up for a number of years, and people have experienced some significant gains. However, the capital gains tax would not be applied until and unless a gain is realized. You realize a gain when you sell appreciated assets.
From an estate planning perspective, the step-up in basis is very useful if you are in a position to pass along appreciated assets.
We should point out the fact that you would be responsible for the appreciation of the assets that you inherit going forward if you were to realize a gain. The gain would be a short-term gain if you sell the assets less than a year after you acquire them. The rate on short-term capital gains is equal to your regular income tax rate.
If you maintain possession of the assets for at least a year before you realize a gain, the gain would be a long-term gain if you sell the assets. The rate will depend upon your income level. Most taxpayers are paying a 15 percent long-term capital gains rate right now, and the highest rate is 20 percent.
On the negative side of the equation, there is a federal estate tax that can come into play if you have enjoyed significant financial success. This tax can potentially be applied on transfers that exceed $11.4 million if you are transferring the assets to anyone other than your spouse.
The maximum rate of the federal estate tax is 40 percent. However, if you implement the appropriate financial planning strategies as you are looking ahead toward the future, you can take steps to ease the tax burden.
Your financial plan should be carefully constructed to ideally suit your needs. Each family is different, and the ideal plan will vary depending on the circumstances.
You should discuss your financial planning objectives with a licensed professional and make fully informed decisions. If you take the right steps, you can preserve your wealth as you facilitate efficient postmortem asset transfers.
Our firm can help if you are ready to take action. We have helped countless folks here in the greater Los Angeles area over the years, and we would be glad to do the same for you and your family.
Many people are a bit hesitant when they think about discussing financial matters with an attorney because of the sensitivity of the subject. We take this dynamic to heart, and we make sure that our clients feel comfortable every step of the way. To set up a consultation, send us a message through our contact page or call us at 310-337-7696.
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