Old strategy helped by tax law changes

Changes in tax law have brought an old strategy back for taxpayers in North Carolina and across the country. It allows taxpayers to save taxes on appreciated assets. The renewed interest in the strategy comes from an increase in the number of tax exemptions that went up to $11.4 million.

The practical steps of the tax strategy, which is sometimes referred to as upstream planning, involve the taxpayer making a gift of an appreciated asset to an older relative with the understanding that the relative will bequeath the asset back in his or her will. The cost-basis in the asset is stepped-up at the time of the gift, so the taxes on any gain to that point may be avoided.

For example, in a case where the taxpayer wants to sell an asset that has appreciated in value from $100,000 to $1 million, he or she may want to avoid paying capital gains tax on the $900,000 in gains. Gifting the asset to an older relative delays the sale of the asset for some time, but it also steps up the cost basis in the asset so the $900,000 in appreciation may become untaxable.

Upstream planning may only be useful in cases where both parties have room under the estate tax exemption. If the gift would be subject to estate tax, then taxes will have to be paid on the value of the asset then. The tax rates may be different though.

The Internal Revenue Service has the power to unwind transactions where it finds the transfer was only for tax-avoidance. An attorney with experience practicing tax law might be able to help North Carolina taxpayers with estate tax planning or by suggesting strategies to reduce the amount of tax owed. An attorney may also help by communicating with the IRS on the taxpayer’s behalf.