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A cautionary note about capital gains

Warning: You can owe capital gains taxes even if your estate doesn’t owe estate taxes.

How does this unwelcome surprise happen? Let’s look at an example:

Dad died last year. Mom died 10 years ago, before Dad. They had “A/B trusts,” which were recommended to them by their lawyer. The “A Trust,” called the Survivor’s Trust, belonged to Dad, and the “B Trust,” called the Decedent’s Trust, belonged to Mom, because she died first.

Mom owned the house and stocks at her death 10 years, which have steadily increased in value, even after Dad’s death.

Problem: Even though Mom had no estate tax to pay at her death, when these assets are sold by the children now that Dad has died, the children may have to pay capital gains taxes on the sale of the assets.

Reason: Assets in the Decedents Trust do not receive a step up in income tax basis at the death of the second spouse. That’s because the second spouse did not own the assets. Rather, the Decedent’s Trust (B Trust) owned them and thus no step up is available.

Solution: File an estate tax return for Mom even though one may not have been filed 10 years ago at the time of her death. When this return is filed we can, with a so-called “Q-Tip election,” focus the estate tax return to achieve income tax protection instead of any unneeded estate tax protection.

Note: This is complex but certainly worth the effort in order to save, for example, $150,000 in capital gains taxes.

It also points out that estate, trust and probate administration are not for amateurs or do-it-yourselfers.

For more, call 847-292-1220, e-mail abferraro@abferrarolaw.com or visit www.ABFerraroLaw.com.

About Anthony B. Ferraro

Anthony B. Ferraro is the founder and managing member at the Law Offices of Anthony B. Ferraro. He received his Bachelor of Science degree in accountancy from DePaul University and his Master of Science in taxation. After receiving his CPA designation in 1978, he enrolled in law school, earning his Juris Doctor in 1983 from De Paul University. An elder law practitioner, his practice areas include Medicaid planning and applications, guardianship, probate & trust administration, long-term care planning, nursing home contracts and admission, senior estate planning, special needs planning, estate planning, and estate taxation.

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