CAPITAL GAINS TAX: The Top 10 Current Issues and Planning Opportunities

The rise in capital gains tax rates and the higher federal estate tax exemption have shifted the estate planning paradigm. Across the nation, long-term capital gains tax rates now range from 25% to 33%, with the combination of the top federal, state and local rates, along with the Medicare surtax. This demands a fresh look at current planning strategies.

When assets are included in an estate, they are subject to estate tax, but the assets enjoy a step-up in basis for income-tax purposes. Gains tax can then be avoided. However, if there is no estate tax because the gross estate assets are below the estate tax exemption amount, then it may make sense to keep assets inside the estate.

Many estate planning attorneys have spent the first half of their careers getting assets out of their clients’ estates, but now they might spend the second half of their careers getting assets back into their clients’ estates (for those individual estates under $5.43MM or joint estates under about $11MM).

As part of McManus & Associates’ Educational Conference Call series, John O. McManus this month examined how to shift gears in light of new, unique opportunities. We invite you to listen to the recording to find detailed information on the Top 10 issues and planning opportunities related to capital gains tax.

LISTEN HERE: “Top 10 Current Issues and Planning Opportunities with Capital Gains Tax”

  1. The Basics of Basis. Cost basis is the original acquisition value of an asset for tax purposes (usually the purchase price or the inherited price), adjusted for stock splits, dividends and return of capital distributions. This original value is used to determine the capital gain – and becomes the difference between the asset’s cost basis and the current market value.
    1. Assets with a high basis include cash (which actually has no basis) and recently purchased assets that have not yet appreciated.
    2. Assets with a low basis include Exxon stock your grandfather gave to you and a Brooklyn brownstone purchased in the ‘60’s that have significantly appreciated.
  2. Striking while the Step-Up’s Hot. A step-up in basis is the readjustment of the value of an appreciated asset for tax purposes. With a step-up in basis, the value of the asset is determined to be the higher market value of the asset at the time of transfer, not the value at which the original party purchased the asset.
    1. When an asset is gifted to an individual or to a trust, there is a carryover of the original basis – meaning there is no step-up in basis. Although the asset is now outside the grantor’s estate for estate tax purposes, upon the sale of the asset, there will be capital gains tax to be paid.
    2. When an asset is included in a decedent’s estate, the asset receives a step-up in basis to the date of death value at that time. The asset can be sold to avoid any capital gains tax.
  3. Transfer Up to Get Capital Gains Down. Transferring an asset “upstream” to your parents or a trust for the benefit of your parents will enable the asset to get a step–up in basis upon the parents’ death.
    1. At that time, the parents would leave the asset back to the client or the client’s descendants in trust, and the asset could then be liquidated free of capital gains tax.
    2. Don’t forget that you use part of your lifetime exemption based on the value of the upstream gift.
  4. Remember the Second Half of Estate Planning Attorneys’ Careers? Assets previously gifted by clients directly to family members or in trust for estate tax minimization purposes may have appreciated significantly, causing unintended capital gains tax consequences for their loved ones.
    1. With the current $5.43MM federal estate tax exemption, clients may no longer have exposure to estate taxes. Thus, they may consider intentionally undermining the prior gifting plan to cause the asset to be included in their estate, achieving the step-up in basis on death.
    2. If we prepared your trust, we provided an asset substitution provision, which allows you to swap low basis assets out of the trust back into the estate. This would allow a step-up in basis upon death.
  5. Speeding up the Process when You Want to Sell Now. For older clients who wish to sell highly appreciated assets in the near-term, several trust strategies can provide the benefit of a step-up in basis upon the passing of the first spouse.
    1. For jointly held assets, if the surviving spouse were to sell after the first spouse’s passing, the survivor would still owe capital gains tax on his or her remaining 50% interest in the asset.
    2. Community Property Trusts with a situs in Alaska or Tennessee, Joint-Exempt Step-Up Trusts (JEST), and Estate Trusts are all planning vehicles that are structured to allow for the surviving spouse to sell an appreciated asset without the imposition of any capital gains tax after the first spouse’s death. Make certain that there is a separate side agreement that the property is treated as community property
  6. Tinkering with the Taxation of Capital Gains in a Trust. For non-grantor trusts, long-term capital gains are not included in distributable net income (DNI) and are taxed at the top marginal rate.
    1. The trust itself may allow for the trustee to have discretionary powers to distribute principal, as well as the power to shift capital gains to income for inclusion in DNI.
    2. An alternate for the power to adjust is the use of the state unitrust statute. A unitrust generally allows a fiduciary to calculate the trust’s income as a percentage of the trust’s assets, as of either the beginning of the year or averaged over some period (NY provides for unitrusts while NJ does not).
    3. However, NJ does allow for a safe harbor power to adjust; a trustee is permitted to adjust the distribution to the income beneficiary (from 3%-5% of the FMV of the trust’s assets in any accounting period). This adjustment must be deemed to be responsible and fair to all of the trust’s beneficiaries.
    4. If possible, utilize a grantor trust and have all income, deductions, and credits, including capital gains, taxed to the grantor at a presumably lower individual income tax rate.
    5. Consider switching the situs of the trust to a state that does not have state gains tax.
  7. Spending Time to Save Money. You may be able to exclude some or all of the gain that is taxed on the sale of your principal residence. The  tax code permits owners of homes to exclude up to $250,000 of capital gain ($500,000 for a married couple) if they have owned and lived in their home for at least two years out of the five years before a sale.
    1. Find better assets to gift than your personal residence.
    2. If you receive a house as a gift and then reside in it as your primary residence for two years, you may be able to reduce or eliminate the capital gains tax on the carryover basis.
  8. The IRS’s Gift for Giving Back. When gifts of appreciated long-term assets are made to charity, no capital gains taxes are owed, because the securities are donated, not sold.
    1. The deduction is limited to 30% of your adjusted gross income (AGI) instead of the usual 50% limit for donations of cash and short-term property made to public charities—though you can still carry forward unused deductions for five years.
    2. If you choose to deduct your cost basis only, you can raise the limit to 50% of your AGI. But if you’re holding securities with a loss, it’s better to sell first, take the capital loss for tax purposes, and then donate the cash.
    3. A Charitable Remainder Trust and a Private Operating Foundation may provide similar relief from capital gains tax.
  9. The 411 on a 1031 Exchange. A 1031 Exchange is a way to delay capital gains taxation by rolling the sale proceeds of the original asset into a new investment in a like-kind asset.
    1. This is traditionally used as a strategy for real estate, but it also works for artwork.
    2. The new investment takes the original basis, which is carried over based on the original basis of the asset.
    3. If the owner dies with the asset in his estate, there is a step-up in basis with little to no capital gain upon sale soon thereafter.
  10. Consider the Tax-Free Possibilities. Two special savings accounts are given a pass by the IRS in terms of taxation.
    1. Contributions to a Roth IRA are after-tax and, as such, all future growth and distributions are tax-free.
    2. Contributions to a 529 College Savings Account also grow tax-free and withdrawals for educational expenses are tax-free.



Posted in Conference Call Tagged , , , , , ,

McManus Guidance on How Parents Can Help Protect Young-Adult Children Featured in College Series

Colleen Moriarty, a seasoned health and lifestyle writer and a staff writer for, recently tapped McManus & Associates for advice on important legal documents that should be put in place for children who are already 18 or will soon be of legal age before they head off to school. Her article, “Help Your Child Stay Safe at College”, is part of a series called Off to College 2015: The First Six Weeks.

Moriarty’s article opens by shedding light on the importance of planning ahead to protect college-bound children, because, as McManus points out:

“If an accident, emergency, mental health crisis or trouble with substance abuse should arise after your son or daughter’s 18th birthday, you have little or no legal right to step in without legal documents that explicitly give you that authority.”

Before adult children become big men and women on campus, which legal documents should they strongly consider completing to provide parents with the authority to act with respect to their medical, legal and financial needs if they get sick or hurt, or are otherwise unable to handle their own affairs? A helpful graphic from the story:

graphic for college series blogAccording to McManus, “without these executed documents, colleges, clinics and hospitals will not release a student’s medical records — even to parents — if the student is over the age of 18…Without a back-up decision maker in place [meaning a parent or other designated adult], there is a risk of inadequate, inappropriate or insufficient medical care if your child is incapacitated.”

Of note, these legal documents cannot be signed until the age of 18, and they can be revoked at any time.

So how should a parent discuss the need for such legal documents with their newly adult child? McManus shared personal experience to convey his thoughts:

“Being the child of an attorney, my daughter pored through these documents to find out exactly what powers she was giving. She signed because she realized that they could keep her safe if she got into an accident or had a medical emergency while at college. The piece that I emphasized with her was that her mother and I would only step in if she was in danger – and that’s danger with a capital ‘D’.”

To see the list of DOs and DON’Ts for parents when it comes to working with a child to get these documents in place, find the full article here.

To ensure that the correct documents (forms vary by state) are properly executed to adequately protect your adult child, call McManus & Associates at 908-898-0100 or send an email to

Posted in Media Clips Tagged , , , , , , , , , ,

The Art of Gifting: Top 10 Issues with Owning and Gifting Artwork

Owning artwork is not only a cultural indulgence, but the sophisticated (and the lucky) possess artwork as an investment that can provide a handsome return. Auction houses, most recently Christie’s, have seen record-setting bids as fine art wrestles to take its position as an asset class equal to equities, commodities, and other hard assets. In light of the increase in capital gains tax combined with the collector’s desire to reduce the imposition of income tax and estate tax, the field is ripe for sophisticated planning.

As part of it Educational Conference Call series, John O. McManus this month discussed strategies to addresses the hard and soft issues surrounding the ownership and transfer of art. We invite you to listen to the recording to find detailed information on the Top 10 issues with owning and gifting artwork that follows, whether you’re an artist, dealer, investor or collector.

LISTEN HERE: “Top 10 Issues with Owning and Gifting Artwork”

Continue reading

Posted in Conference Call Tagged , , , , , , , , ,

The Money Coach® Taps McManus for “3 financial lessons that could protect your heirs”

Get Rich Slowly



Lynnette Khalfani-Cox is known as The Money Coach®; she’s a personal finance expert, television and radio personality, and the author of 12 books, including a New York Times bestseller. She recently reached out to John McManus for guidance on how to avoid a quandary like the one her family faced when three loved ones passed away in short order.

Writing for Get Rich Slowly, a personal finance publication with over 750,000 regular readers, The Money Coach® shares her heartbreaking story, which includes a nightmare custody proceeding after her sister passed away.

Continue reading

Posted in Media Clips Tagged , , , , , , ,

Top 10 “Non-Run-of-the-Mill” Ideas as You Prepare to See Your Child Off to College

“YIKES! My child is leaving for college in two months.”

The summer before a child enters his or her freshman year of college is filled with excitement and consternation, happiness and remorse, confidence and concern. McGraw Hill Education notes that 25 percent of college students drop out of their first year due to not being academically, emotionally, or financially prepared for college life and adulthood. Now is your chance to help your child in his or her final preparation.

Because Family Mission Planning is a cornerstone of McManus & Associates’ approach to estate planning, the firm has compiled a list of ideas and research that can help families stay on track with their individual mission statements as college-bound children leave the nest. Here are 10 pieces of advice that you may not have gathered from your high school guidance office, selected universities or friends with adult children, but that we think might hold an equal amount of wisdom:

LISTEN HERE: “Top 10 ‘Non-Run-of-the-Mill’ Ideas as You Prepare to See Your Child Off to College”

Continue reading

Posted in Conference Call, Press Releases Tagged , , , , , ,

McManus & Associates Client Featured in New York Times Column on Family Business Succession

Paul Sullivan writes the “Wealth Matters” column for the New York Times, which shares insights on the mindset and strategies of the affluent. Recently, McManus & Associates Founding Principal John O. McManus chatted with Sullivan about the decisions that adult children who are expected to take over a family business face and connected Paul with his client Sharon Madison, a remarkable woman who successfully navigated the challenge of family business succession.

Sullivan’s article leads with Madison’s dedication that kept United Building Maintenance, the business that her father started, on its successful path after he became ill.

Continue reading

Posted in Media Clips Tagged , , , , , ,

McManus Cited in “College Financing Q&A” from the Wall Street Journal

wsj logo

In February, Andrea Coombes wrote an article, titled “The Tax-Smart Way to Draw ‘529’ Funds”, about education tax benefits for the Wall Street Journal’s Investing in Funds report. The piece generated a number of follow-up questions from readers. Here’s one that came across Coombes’ desk:

“Before he died, my father contributed to a 529 on behalf of my daughter [his granddaughter]. Need anything be done now to ensure that my daughter is able to use these funds for tuition?”

To help answer this question, Coombes turned to John O. McManus, top-rated tax and estate planning lawyer who founded McManus & Associates. The firm offers income tax planning among its services.

Continue reading

Posted in Media Clips Tagged , , , ,

Trusts & Estates, Publishes Guest Article from McManus on Coordination of Income Tax and Estate Planning

trusts and estates logo


Combine Income Tax Preparation and Estate Planning

Coordination is key

Apr 1, 2015 John McManus Trusts & Estates

When tackling a jigsaw puzzle, you’ve likely taken the “divide and conquer” approach, separating the larger puzzle into more manageable sections. Eventually, you bring the different areas of focus together to put the finishing touches on the full image.

Wealth management is the same. Estate planning emphasizes an array of complex matters spanning death taxes, asset protection, incapacity, guardianship and family missions. Compartmentalizing can be helpful, but advisors must remember to bring the pieces of the puzzle back together in the end. It’s critical that strategies to maximize the value of your clients’ estates are coordinated with their retirement, financial and income tax planning.

Continue reading

Posted in Media Clips Tagged , , , , , , , ,

McManus Weighs in on IRS’ Dirty Dozen Tax Scams for ThinkAdvisor

Photo credit: Lendingmemo

Photo credit: Lendingmemo

The IRS recently issued its list of “Dirty Dozen” tax schemes, an annual release that kicks off tax season. Michael Fischer, contributor for ThinkAdvisor, took a closer look at the 12 scams and tapped McManus & Associates Founder John O. McManus for his guidance on two that specifically impact high-net-worth individuals (HNWIs): “Stashing cash offshore” and “Abusive tax shelters”.

Continue reading

Posted in Media Clips Tagged , , , , ,

Firm’s Tax Experts Hold Conference Call on Income Tax Preparation

McManus & Associates can prepare your Income Tax Returns. For many years, the firm has been completing tax returns for clients and has learned that keeping income tax planning under the same roof enables a more refined level of specificity in estate planning for your family. Want to hear more about how you can benefit from McManus & Associates’ Income Tax Planning Practice? Listen to the firm’s recent conference call with clients (link below) and contact us at 908-898-0100/212-753-9000.

LISTEN HERE: “Preparing Your Tax Returns”

pennies photo

Posted in Conference Call Tagged , , , , , , , ,