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Mitigating capital gains tax on your California estate

On Behalf of | Jun 20, 2023 | Estate Planning

When an owner sells property or investment gains value for profit, the law requires them to pay tax on the profit, known as capital gains tax. In California, a significant part of estate planning involves devising strategies that can limit this tax and preserve wealth for the heirs.

Consider these strategies that California estate owners can use to minimize capital gains tax.

Understand the step-up basis

A beneficial tax rule allows the value of a property to ‘step up‘ to its fair market value at the time of the original owner’s death. So, if an inheritor sells the property, they only need to pay capital gains tax on the increase in value after the inheritance. This rule, known as the step-up basis, can significantly shrink the capital gains tax bill.

Gift the estate

One can also gift the property before death. While this does not eliminate capital gains tax, it shifts the liability to the recipient. However, the recipient may end up paying more in capital gains tax when they sell the property because they inherit the original owner’s basis.

Establish a trust

Creating specific trusts like grantor-retained annuity trusts or charitable remainder trusts can also limit capital gains tax. These trusts let the grantor pass assets to beneficiaries without creating a capital gains tax bill. However, these trusts carry their own rules and regulations.

Retain the property

One of the most straightforward strategies involves not selling the property. Since capital gains tax only comes into play when selling a property, heirs who choose to keep and use the property rather than sell it will not trigger capital gains tax.

Estate owners in California have several strategies at their disposal to limit the capital gains tax on their estate. Everyone’s situation is different, and the best approach depends on factors like the estate’s value, the types of assets and the financial circumstances of the heirs.