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Capital gains tax considerations can pop up in estate planning

On Behalf of | May 22, 2012 | Inheritance And Estate Tax |

Tax implications are around every corner when it comes to estate planning. Not only is there estate and gift taxes to think about, but also income and capital gains taxes to consider. The way one disposes of items in one’s plan can trigger different tax consequences, and it is important to consider all possible scenarios when setting up one’s plan.

To take an example out of a recent article in the Star Ledger, what kind of tax would be at stake regarding a classic car which is owned by a husband and bequeathed to his wife? In particular, would it be better from a tax perspective for the wife to be added to the title or to simply inherit the car after the death of her husband?

The answer to the question lies in the calculation of the car’s tax basis, which is the initial value used in calculating capital gains tax. Because the tax basis is different if the car is a gift than it is if the car is inherited, there will be varying capital gains tax consequences.

If the car is inherited, the tax basis would be the fair market value at the date of the husband’s death, but if the car is a gift, the tax basis is more complicated. In the latter case, half of the car’s value would be one half of the vehicle’s value at the husband’s date of death. The half of the value owned by the wife would be one-half of the vehicle’s original basis. The sum of the two would amount to the tax basis, which would be subtracted from the sale price of the car, resulting in the capital gain to be reported.

Another factor to mix into this situation would be the order of death. If the husband dies first, there will be a different tax result-because of the way the cost basis is calculated-than if the wife died first.

The health situation of each spouse will likely be a factor in how it is best to structure such a transaction. As always, it is smart to speak with a knowledgeable attorney on such matters, since an attorney will not only know the relevant law, but also have the ability to ensure one’s specific estate planning goals are met.

Source: nj.com, “Biz Brain: Better to inherit or share title to spouse’s classic car,” Karin Price Mueller, May 20, 2012.