Trusts and Estate Taxes
If you’re an international entrepreneur with assets in the US, tax planning is crucial
In the trusts, estate planning and probate fields, estate taxes, property taxes and income & capital gains taxes have the potential to be extensive. And if you fail to predict the amount of these taxes, you could get yourself into a difficult situation if a money or property transfer is made.
One of the most prevalent examples of this is when the elderly decide to transfer legal ownership of their house to their children. Most do this simply because their children would get this anyway when they pass. However, whilst this may appear like a good idea on the surface, this form of transfer can cause the recipients to have huge capital gains income taxes to pay if they decide to eventually sell the house.
For example, let’s say an elderly couple originally paid $100,000 for their house. Then, when they transfer ownership to their children, the overall value of their house has increased to $600,000.
Under current income tax laws, the children who receive this house gift will take over their parents’ tax basis which is $100,000. But then, if the children decide to sell the house for its current value of $600,00, they will have $500,000 reportable capital gains which would amount to an estimated $166,650 in federal and state income tax. Worse still, if the children haven’t completed all the correct paperwork with the county assessor, the overall property taxes are likely to increase by a large amount.
To counteract these incredibly high tax amounts, it would have been a far better idea if the parents simply keep legal ownership of their house until they pass on. The children would then inherit the house, as opposed to receiving it as a gift.
Property inheritance means the tax basis will be increased to the value of the date of death. In this case, it would be $600,000. Then, if the children decided to sell the house, they wouldn’t have any capital gains tax as opposed to the figure of $166,650 they would incur had they received the house prior to their parents’ passing.
However, this concept doesn’t apply to all circumstances. For example, if the parents own a substantial estate that’s subjected to the federal estate tax of around 40%, they may actually save on estate taxes if they choose to gift the house to their children before passing.
All counties and states within the US have multiple forms to determine whether property taxes should be increased or not with regard to a particular transfer. Here at Mount Bonnell Advisors, we assist clients on all steps within property transfers, in addition to ensuring the correct forms are used to help prevent property taxes rising.
Generally, we attempt to structure property transactions to reduce the chance of taxes increasing. Property tax exemptions of increase can often be incredibly complication, and will sometimes depend upon giving the relevant county assessor a detailed explanation and/or having a legitimate trust documents in use that will be accepted.
With many estates in today’s society being below the current federal tax exemption ($5 million per person plus living-cost increase), our tailored estate plans have been specifically designed to minimize estate taxes.
However, because federal estate taxes have a strong history of much lower tax exemptions, there’s zero guarantee that such exemptions will remain as high as they are now indefinitely. Therefore, our documentation always considers the possibility that exemptions may be lowered, meaning appropriate planning and accurate allocation of asset issues are done.
A prominent factor in many trusts and estates, there’s typically many options to choose from for how transactions are structured with regard to income taxes.
If a business is particularly closely-held, we pay prominent attention to the exact form of ownership and agreements present between various owners. This will help minimize legal taxes or any potential legal problems if one of the owners should pass. Having represented multiple clients in very difficult situations, we have seen many examples of when closely-held business owners failed to plan for an unexpected death of another owner – simply leaving it to chance.
If this happens, a prolonged and typically very expensive litigation may occur. But if the correct agreements and documentation had been present in the first place, this could have been prevented altogether.
When it comes to income taxes, they’re typically a cause for concern with taking tax deductions, tax-deferred exchanges, ownership issues and almost any gift, sale or purchase made. As there are multiple different corporation types for income tax, if proper forms aren’t filed with the IRS within a strict given deadline, the income tax treatment of the corporation might not actually be what the owners expected.
But here at Mount Bonnell Advisors, we take the time to discuss all potential issues with our clients. This ensures an appropriate strategy is established well in advance, guaranteeing a full understanding of any tax consequence that could arise.
As part of Mount Bonnell Advisors, we have a vast array of certified public accountants and attorneys working alongside us. Experts in all tax forms and computer systems due to regularly completing income and federal estate tax returns, they’re able to accurately compute and predict taxes for virtually any type of probate situation or estate planning transfer.
Therefore, during a consultation with us, the exact forms that would be involved in transaction tax reporting are instantly pulled-up on screen – and can be explained in as much detail as necessary.
Frequently Asked Questions (FAQs) About Taxes, Company Formation, and Residency in the U.S.
Starting a business in the U.S. can be both exhilarating and exasperating. There is much to know and even more to learn, and the pace of the information coming at you can be overwhelming.
That’s where Mount Bonnell Advisors come in.
Would you like to live your very own American Dream? At Mount Bonnell, we can guide you through the labyrinth of regulation and red tape and out into the blue skies of a dream come true – the dream of living and working in America.
Whether it’s technical issues around tax or residency, or strategic ones involving business formation and growth, the experienced team at Mount Bonnell Advisors are here to help.
So make that dream a reality by booking a consultation today with Mount Bonnell Advisors. Let the adventure commence!