The question of avoiding capital gains tax through the use of a testamentary trust is a frequent one for estate planning attorneys like Steve Bliss in Escondido, and the answer, as with most tax-related matters, is nuanced. While a testamentary trust—created within a will and taking effect after death—doesn’t offer a complete exemption from capital gains, it can be a valuable tool in *deferring* those taxes and potentially minimizing the overall amount paid. This strategy hinges on the concept of a “step-up in basis,” a powerful benefit available to inherited assets, and careful trust structuring. Approximately 40% of estates are large enough to potentially be subject to estate tax, a complex landscape where minimizing tax burden is paramount, and testamentary trusts can play a significant role.
What is the “Step-Up in Basis” and How Does it Work?
The “step-up in basis” is a cornerstone of estate tax planning. When an asset is inherited, its cost basis—the original price paid for it—is adjusted to its fair market value on the date of the decedent’s death. This means that the beneficiary only pays capital gains tax on any *increase* in value that occurs *after* the date of death, not on the entire appreciation over the decedent’s lifetime. For example, if an individual purchased stock for $10,000 decades ago, and it’s worth $100,000 at the time of their death, the beneficiary inherits the stock with a basis of $100,000. If they later sell it for $110,000, they only pay capital gains tax on the $10,000 difference. A testamentary trust, properly structured, can preserve this critical step-up in basis for future generations.
How Does a Testamentary Trust Differ From Other Trusts?
Unlike a revocable living trust, which is created and funded during the grantor’s lifetime, a testamentary trust is established *within* a will and comes into effect only after death. This means the assets are subject to probate before being transferred to the trust. It’s important to remember that probate itself doesn’t trigger capital gains, it’s the subsequent sale of assets that creates the tax liability. However, a testamentary trust allows for continued asset management and potential tax planning benefits for beneficiaries who may not be financially savvy or require long-term support. One client, Mrs. Gable, came to Steve Bliss after her husband’s passing; his will had established a testamentary trust for their disabled son. Without the trust, the son would have received a large inheritance directly, potentially jeopardizing his government benefits and exposing him to financial exploitation. The trust allowed for professional management of the funds and ensured his continued care.
What Went Wrong With Old Man Hemmings Estate?
Old Man Hemmings, a successful local developer, believed he had everything covered with a simple will. He failed to establish any type of trust, testamentary or otherwise. After his passing, his estate went through probate, and his children, eager to settle things quickly, sold off several properties shortly thereafter. Because the properties had been held for decades and significantly appreciated in value, the sale triggered a substantial capital gains tax – over $300,000! Had he established a testamentary trust, the assets could have been managed more strategically, potentially allowing for phased sales over time, minimizing the tax impact and providing ongoing income for the family. It was a painful lesson in the importance of proactive estate planning. Approximately 68% of adults in the US do not have a will or trust, leaving their estates vulnerable to such outcomes.
How Did the Andersons Get It Right With a Testamentary Trust?
The Andersons, a family with substantial real estate holdings, consulted Steve Bliss to create a comprehensive estate plan. They chose to establish a testamentary trust within their wills, with provisions for staggered distribution to their children over a period of years. When the father passed away, the estate went through probate, and the assets were transferred to the trust. The trustee, guided by Steve’s advice, sold off a portion of the properties each year, carefully managing the sales to minimize the capital gains tax and maximize the benefits to the children. The careful planning resulted in significant tax savings, allowing the children to receive a larger inheritance and providing them with financial security for years to come. It was a perfect example of how a testamentary trust, when used strategically, could be a powerful tool for preserving wealth and protecting future generations.
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About Steve Bliss at Escondido Probate Law:
Escondido Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
estate planning
living trust
revocable living trust
family trust
wills
banckruptcy attorney
Map To Steve Bliss Law in Temecula:
https://maps.app.goo.gl/oKQi5hQwZ26gkzpe9
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Address:
Escondido Probate Law720 N Broadway #107, Escondido, CA 92025
(760)884-4044
Feel free to ask Attorney Steve Bliss about: “What is a revocable living trust and how does it work?” Or “What are letters testamentary and why are they important?” or “Can I include special instructions in my living trust? and even: “How does bankruptcy affect my credit score?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.