When you’re putting together an estate plan, it’s easy to focus on the basics—who gets what and when. But what many people don’t think about is how taxes could affect the value of what they leave behind. One of the most important taxes to understand is the capital gains tax, especially if you own real estate, stocks, or other investments that have grown in value. The good news is, with the right planning, you can help your loved ones avoid unnecessary tax bills and keep more of what you’ve worked hard to build.
What Is Capital Gains Tax?
Capital gains tax is what you pay when you sell certain assets for more than you originally paid. This includes things like your home, rental property, stocks, or a business. The difference between the original purchase price (called the “basis”) and the sale price is the gain, and that gain is usually taxable.
There are two types:
- Short-term capital gains, for assets held less than a year, are taxed as regular income.
- Long-term capital gains, for assets held longer than a year, are taxed at lower rates.
In California, capital gains are taxed as regular income by the state, even if they are long-term and qualify for lower federal tax rates. That means the impact can be significant if you don’t plan ahead.
How Step-Up in Basis Helps
One of the most valuable tools in estate planning is something called the step-up in basis. When someone passes away, the value of their assets is generally “stepped up” to what the asset was worth on the date of death. This adjustment can reduce or even eliminate capital gains tax if the asset is sold soon after.
Here’s an example: Let’s say you bought a home for $200,000, and by the time you pass away, it’s worth $800,000. If your child inherits the house and sells it soon after, they’re taxed only on the gain above $800,000, not the original $600,000 increase. That step-up can save your beneficiaries thousands—or even hundreds of thousands—in taxes.
Without a step-up, your heirs would be stuck with your original basis and would owe tax on the entire gain.
When Capital Gains Still Apply
Although the step-up in basis helps in many situations, there are times when capital gains tax still applies.
Some examples include:
- Gifts during your lifetime: If you give your home or stock to someone before you pass away, they take on your original basis. That means no step-up and a larger tax bill when they sell.
- Assets sold long after inheritance: If your heirs hold onto an inherited asset and it continues to grow in value, they’ll owe capital gains tax on the growth beyond the stepped-up basis.
- Certain trust structures: Depending on how a trust is set up, it could impact whether the step-up applies.
These situations can be avoided or managed with proper planning, but they often catch families off guard.
Ways to Reduce Capital Gains Through Estate Planning
There are several ways we can help you reduce capital gains taxes in your estate plan. Some of the most common strategies include:
- Revocable living trusts: These help avoid probate and allow your assets to be passed on with the step-up in basis intact.
- Charitable remainder trusts (CRTs): These can allow you to donate appreciated assets to charity, provide income for yourself or others, and reduce capital gains.
- Timing sales: If your heirs wait to sell or sell too soon, they could face higher taxes. We can guide them on how and when to make decisions that make sense for their situation.
- Keep certain assets in your estate: Sometimes it’s better to hold onto highly appreciated assets rather than gift them during your lifetime. That way, your heirs benefit from the step-up instead of getting stuck with your original basis.
Every family is different, so we take the time to walk through your goals, your assets, and your concerns before offering any recommendations.
How We Can Help You Plan Ahead
At OC Wills & Trust Attorneys, we help families across Orange County think about the big picture. That includes understanding how taxes like capital gains could affect your estate, and what you can do now to reduce the impact later.
We’ll review your assets, explain your options in plain language, and help you make choices that work for you and your loved ones. Our team is here to give you peace of mind, whether you’re just starting or updating an existing plan.
Plan Today to Avoid Tax Surprises Tomorrow
Capital gains tax doesn’t have to be a surprise. With a thoughtful estate plan, you can make sure your family keeps more of what you leave behind.
Ready to start planning? Contact OC Wills & Trust Attorneys today to schedule a consultation.
