Avoiding Tax on Capital Gains – Planning for Highly Appreciated Assets

One of the common problems we run into in transferring the family farm or ranch from one generation to the next is the problem of the income tax on capital gains. Because the assets have usually been held for a significant period of time there is often little or no tax basis.  As a result, depending upon the current value of the asset, the tax on capital gains could be significant.  If you find yourself in this situation is there anything you can do?One option is to wait and sell the property after the death of the current owner or owners.  If you live in a community property state, a full step-up in basis is received on the death of each spouse.  If you live in a separate property state, you get a step-up only as to the deceased spouse’s share on the first death and then a second step-up on the second spouse’s death.  If you don’t live in a community property state and want to re-characterize your property as community property this is possible through the use of an Alaska Community Property Trust.If you can’t or don’t want to wait it out, other strategies exist to minimize or eliminate the imposition of the tax on capital gains.  By giving the appreciated asset to a charity or a charitable trust and consummating the sale through that entity, the tax is eliminated.  By using the charitable trust, an income stream can be created for the balance of your life with the remainder going to charity.  This particular type of trust is known as a charitable remainder trust.  By further involving life insurance in the process you can create a situation where taxes are avoided, a gift is made to charity and your beneficiaries inherit a tax favored asset.If you are so inclined, there are many opportunities to plan in ways that will benefit you, your family and the greater good.