Attorney Michael Gilfix Analyzes Wall Street Journal Discussion of Capital Gains Tax Issues

Palo Alto, CA (Law Firm Newswire) January 2, 2015 – A recent article in the Wall Street Journal describes a transformation in estate planning for individuals or couples who have significant assets, but who are not subject to the federal estate tax.

With a federal estate tax exemption set at more than $5 million per individual — a figure set to rise — tax reporter Laura Saunders says that capital gains taxes are now the driving concern in estate planning for many affluent Americans.

“Saunders is absolutely right to point out that, particularly for Californians, capital gains taxes can pose the biggest threat to the integrity of an estate,” remarked Gilfix. “It can become a real problem if families are using an outdated gifting strategy to avoid estate taxes.”

The Wall Street Journal article notes that when the federal estate tax exemption was as low as $1.5 million, many people would give houses and other assets to their children during their lifetime to avoid estate taxes.

Now, couples who have an estate totaling less than $10 million would serve their children better by preserving the asset and handing it down as part of an inheritance. By doing this, the capital gains cost basis of the asset (say, a house) is reset at current market value levels, and the children will not have to pay capital gains taxes based on the original purchase price, should they ever choose to sell it.

According to Gilfix, there is another pressing issue facing families with estates totaling less than $5 million or $10 million for couples: the cost of long-term care.

“People might read the article and think that the use of trusts is outdated, but it isn’t,” remarked Gilfix. “One important function a properly drafted irrevocable trust can serve is asset protection from Medi-Cal recovery.”  

Gilfix says that Californians who use Medi-Cal to pay for the overwhelming cost of long-term care run the risk that the State of California could make a claim against their house or estate after their death to recover the cost of care. Executed correctly, a trust can protect a home or other asset from both Medi-Cal asset recovery and capital gains taxes.