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What is the trust-fund loophole?

The so-called “trust-fund loophole” became a national news item when President Obama referenced it in his recent State of the Union address. The phrase refers to the step-up basis applied to inherited assets.

Yet an attorney that focuses on estate planning knows that more may be implicated than just a proposal to change how capital gains taxes are calculated. If assets were to be valued based on their original purchase price, a significant amount of paperwork and record keeping must be done. However, if a decedent failed to keep records, determining the original cost of an asset (whether it is a share of stock, a personal property item, or a piece of property) could prove to be a scavenger hunt. Moreover, if the original acquisition date of an asset cannot even be determined, the task might seem impossible.

Of course, the proposal is not yet current law. Even if it were, there are a variety of trusts that continue to offer tax advantages, effectively circumventing the potentially adverse impact of capital gains taxes. Transferring securities to a trust is one example.

According to the Internal Revenue Service’s website, capital gains taxes are imposed upon a taxable event, like the sale of an asset or the decedent’s death. Yet if assets have been transferred to a trust, the decedent’s passing will no longer be deemed a taxable event.

So is there a trust that might accomplish your individual objectives? Consider the overview provided on our law firm’s website. Our brief list includes livings wills and trusts, testamentary trusts, charitable trusts, special needs and continuing trusts, irrevocable life insurance trusts, and qualified personal residence trusts. Check out our firm’s website to learn more.

Source: Forbes, “Obama Attack On ‘Trust Fund Loophole’ Could Increase Tax Advantage Of Trusts,” Janet Novack, Jan. 20, 2015

Source: Internal Revenue Service, “Topic 409 – Capital Gains and Losses



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