What You Need to Know About Capital Gains Tax and Inheritance

capital gains tax

What is a Capital Gains Tax?

As you seen from the image above, Capital Gains Tax is a tax on the profits made by the selling of assets from either a company or individual. Most common CGT comes from the sale of stocks, bonds, and property. Each country has their own set of criteria when it comes to the amount of taxes.

For residents of the United States, individuals and businesses pay a U.S. federal income tax on the net worth of their capital gains. The tax rate depends on your tax bracket and the amount of time the investment was held. There are short-term capital gains which are defined as investments held for a year or less and are taxed at the investor’s normal rate. Long-term capital gains are any investment held for more than a year and are taxed at a lower rate.

Inheritors are subjected to different criteria than those who originally owned the assets.

Inherited Capital Gains

Many individuals inherit stocks and bonds when a loved one passes. They are not exempt from paying Capital Gains but the terms differ than if you purchased the investments yourself. Often times, inheritors pay a CGT on profits made from the moment the stock was purchased by the deceased to the time of their passing.

Inheriting a Business and Capital Gains

CGT must also be paid when inheriting a business as well. Gains on a property are calculated by using the original cost of the property. Since the inheritor did not purchase the property originally then they must use something called a basis. The basis is considered the value of the property on the date of passing of the original owner. Anything amount going over the basis when the property is sold is taxable.

How a Living Trust Benefits the Inheritor

A living trust has it advantages when it comes to capital gain. As you have seen above, all of the taxable gains are calculated on the date in which the benefactor passes. This ensures that the gain is less than what the beneficiaries would pay in any other event.

When passing on your assets you hope that they will benefit your inheritors. A living trust is your best chance at achieving this. At Learn Living Trust, we can help you navigate the creation of a living trust.

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