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Yahoo
30-07-2025
- Business
- Yahoo
How to avoid capital gains taxes with highly appreciated stocks
For families locked into highly appreciated stock that could bring a big tax hit from the capital gains on any sale of the holdings, a so-called upstream gift could offer a solution. But the potential door to a step-up in basis that avoids capital gains taxes is only open if the person receiving the stock keeps it until death, updates estate-planning documents for a new beneficiary to receive the holdings and lives at least one year from the date they received the equity, said Ben Rizzuto, a director and wealth strategist with Janus Henderson Investors' Specialist Consulting Group. In a blog post last month, the company used the example of a father who saved $1.5 million in possible taxes on the Apple stock he had held for more than 40 years by gifting it to his father, rather than his son. "The idea of upstream gifting has been around since the tax code was written. The thing that I have found is that people don't think about it from that direction," Rizzuto said in an interview. "At any point in time, someone can have or hold an asset that has a low cost basis and a big unrealized gain, and we need to think about, are there ways that we can help them not incur that tax liability?" While taxes on a gift of more than $19,000 in a single year would not apply to the strategy, the transfer does affect the two estates' values, Rizzuto noted. But the exemptions from estate taxes are high enough (and staying that way, thanks to the One Big Beautiful Bill Act) that the appreciated stock wouldn't pose an impact on most households' plans. READ MORE: Advisors clamor for estate planning tools as attorneys wave red flags Besides the tax implications, large longtime holdings of the same stock sometimes come with emotional baggage tied to keeping them in the family. The upstream gifting of assets adds to other available strategies for highly concentrated or appreciated holdings, such as charitable giving, Section 351 conversions or variable prepaid forwards. Financial advisors and their clients cannot use the upstream gifting strategy for inherited individual retirement accounts, but it could prove beneficial in a number of other situations, according to a 2023 guide by the advisor lead generation and client matchmaking service SmartAsset. "Upstream gifting is a strategy for expediting the transfer of highly appreciated assets to children, while limiting the taxes that will be owed on the inheritance," it read. "Instead of giving assets directly to your children while you're still alive or including them in your will, you can transfer the property to a living parent or grandparent. In turn, they leave those assets to your children when they die, preserving the step-up in basis and saving your children on taxes." The Janus Henderson blog explained the concept through the 10,000 shares of Apple stock that an investor had bought for $800 in December 1983 and held onto as it gained $4,999,200 in value. If the investor simply passes the holdings to the next heir in line, the accumulated capital gains just transfer to the next generation. That beneficiary could get the step-up in basis — meaning that the value for the stock would count for tax purposes on that of the day the heir inherited the position — but only if the investor had died. Instead, the investor shifts the stock up one generation. So when that recipient passes the holdings back down at death, the original investor can get the stock back at the stepped-up basis and avoid the capital gains taxes. "Of course, this strategy requires planning and communication between all parties involved," the Janus Henderson blog said. "And as simple as it is, the strategy is not without risk. What if Grandpa incurs large medical bills or meets the second love of his life? What if he does not live for another year? What if the law changes to eliminate the step-up in basis at death? All these risks — and more — must be weighed before engaging in this strategy. It is essential for investors to retain the advice of their tax preparer or accountant and their attorney before implementing this technique." READ MORE: Using tax-aware long-short vehicles to track down alpha The fact that people are living longer signals the need for more often-difficult conversations about how to transfer assets with the greatest tax efficiency, Rizzuto said. When using the upstream gifting approach, families may even decide to send the assets to "another trusted individual" who isn't a relative, he noted. The important part is planning it out in advance. "I can't just go out on the street and find an older person and say, 'Hey, I've got this idea. Can you help me out?" Rizzuto said. "There has to be some planning and communication that goes on here."
Yahoo
06-04-2025
- Business
- Yahoo
Clients aren't likely to face estate taxes. But they still need a plan
The political calculus involved with the details of estate planning next year and beyond may be distracting financial advisors and clients from a larger, simpler conversation, one expert says. On the off chance that the federal estate-tax exemption levels of $13.99 million for individuals (and double for couples) revert to half those amounts when Tax Cuts and Jobs Act provisions expire in 2026, only 0.2% of households would face potential duties upon transfer of assets, according to Ben Rizzuto, a wealth strategist with Janus Henderson Investors' Specialist Consulting Group. He predicted that most financial advisors and high net worth clients, such as those he works with and others across the industry, will see no changes. With few other revenue-raising provisions available to President Donald Trump and Republican lawmakers, they're not likely to shield all estates from payments to Uncle Sam — as much as they might like to play undertaker to the "Death of the Death Tax," Rizzuto said, using the label for estate taxes adopted by critics favoring bills like the "Death Tax Repeal Act." Lawmakers' decisions on future exemptions from the taxes (and when they make those decisions) remain out of advisors' control. Meanwhile, they must remind clients that estate planning is much more than having a will and avoiding taxes, Rizzuto said. "For financial advisors and clients, I would expect for many of them not to have to worry about federal estate taxes next year," he said in an interview. "Even though they may not have to worry about it, there are still a lot of good conversations to be had." READ MORE: Tax Cuts and Jobs Act expiration: A guide for financial advisors Trust tools that reduce the value of the assets that will transfer to spouses or other beneficiaries upon a client's death, combined with the available statistics about the shrinking share of estates subject to taxes, could bring some peace of mind to clients. The 2017 tax law itself pushed down estate tax liability as a percentage of gross domestic product to a quarter of its 2001 level, according to an analysis by the "Budget Model" of the University of Pennsylvania's Wharton School. Just two years after the law's passage, the number of taxable estates had plummeted to 1,275 — or 1% of the number at the beginning of the century. At the same time, advisors could raise any number of questions with clients about their estates that involve varying degrees of expertise and collaboration with outside professionals. And many surveys have found that clients are expecting them to do so. For example, at least 70% out of a group of 10,000 adults contacted in January by WeAreTalker (formerly OnePoll) on behalf of online legal information service Trust & Will said advisors should offer estate planning. In addition, 40% of the group said they would switch to an advisor who provided that service. "We're seeing a fundamental shift in client expectations," Trust & Will CEO Cody Barbo said in a statement. "The findings are clear. Advisors who fail to integrate estate planning into their practice aren't just missing an opportunity; they are facing a threat to their client base as wealth transfers to younger generations over the next two decades." READ MORE: Ethical wills can be a crucial tool for estate planningIn that context, advisors and their clients should steer clear of trying to make sense of a complicated, ever-changing flow of news from Capitol Hill as Trump and the GOP pursue major tax legislation with a year-end deadline, Rizzuto said. If clients truly could be on the hook for estate taxes, a grantor retained annuity trust, a spousal lifetime access trust or gifting strategies may eliminate the possibility. One method involved with the latter could set them up in the future to receive stock that is "highly appreciated with lower basis," Rizzuto noted, citing the example of equities that have gained a lot of value that a client could give to their parents. "Why not gift them upstream?" Rizzuto said. "My father holds it. I tell him, 'Dad, you have to do these things: Live for another 12 months, make sure you don't sell, make sure that you update your will or your instructions to gift it back to me when you die.' That's another idea that we've been talking about with advisors." From another perspective, these possible paths forward may beckon to clients this year, if they are tuning into Beltway news about the progress of the tax legislation, he said. To bypass the risk of client perceptions that their advisor isn't doing any tax planning at all, Washington's complex maneuvering around the future rules is, "if nothing else," a "great opportunity for advisors to bring this up at a very high level," Rizzuto said. "Advisors will really need to go back to basics and have some foundational conversations with clients," he said, suggesting their goals with taxes as one key point of discussion. "'What is it that we actually control within your financial and tax plan?' When it comes right down to it, it's really just incomes and deductions."
