January 2015
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Doron M. Tisser
Doron M. Tisser is the founder of Tisser & Standing LLP and has been designated as both a Certified Specialist in Estate Planning, Trust and Probate Law as well as a Certified Specialist in Taxation Law by the State Bar of California Board of Legal Specialization. He has been selected as a Top 100 Super Lawyer in Southern California since 2011 and a Super Lawyer for Southern California Since 2009.
Brian H. Standing
Brian H. Standing is a partner of Tisser & Standing LLP and has received his designation as a Certified Specialist in Estate Planning, Trust and Probate Law by the California State Bar Board of Legal Specialization.


What's Happening

Doron M. Tisser has been named a Super Lawyer for 2015 in the field of Estate Planning by his peers. In addition, his point total in the nomination, research and blue ribbon review process put him in the top 100 attorneys in Southern California. Only 5% of all attorneys are selected by their peers as Super Lawyers. This is the 7th year in a row he has been awarded this honor.


President Obama Proposes Estate Tax Changes

President Obama has announced his proposals for changes to the Internal Revenue Code. Among these proposals are changes to various estate tax provisions, which we will discuss in this article.

If you own assets such as stock that you bought, when you sell the assets, you will pay a capital gains tax on the difference between what you sell it for and what you paid for it. The amount you paid for it is known as your "basis". Under current law, when you die, the person who inherits that stock will receive a new basis in the stock equal to its fair market value on the day you die (known as a "step-up in basis"), which allows the beneficiary to sell the stock capital gains tax free. For example, if you bought stock for $10 and sell it for $100, you pay capital gains tax on the $90 of appreciation in the value of the stock. If you die, however, your beneficiary gets a step-up in basis to $100 (the value at your death). If the beneficiary then sells the stock for $100, the beneficiary pays no capital gains tax.


At the same time, if you gift the stock to your child, there are generally no gift tax consequences (assuming the gift is less than $5.43 million as of today). Your child, however, would not receive a stepped-up basis in the stock. Instead, your child receives your basis in the stock and pays the capital gains tax when he or she sells the stock.


The President believes that the step-up in basis is a benefit for the wealthy and helps them avoid paying taxes, calling this "the largest capital gains loophole". To remedy this perceived notion, the proposal provides that when you die, your family will pay a capital gains tax on the difference between the value at the date of your death and your basis in the asset, in effect treating your death as a sale of your assets. The same rule would apply to a gift you make during your lifetime.   


There are three exceptions to this proposal:  

  1. The first $100,000 per person ($200,000 per married couple) would be exempt from this capital gains tax.
  2. $250,000 per person ($500,000 for a married couple) for a personal residence would be exempt.
  3. All personal property (except for valuable art and collectibles) would be exempt from this tax.

It is important to note that this tax would apply to everyone, not just the wealthy. So if a parent dies and a child inherits $250,000 of stock, the first $100,000 of value would be exempt. The remaining $150,000 of value would be subject to an immediate capital gains tax at the parent's death. This might require the child to sell stock to pay the capital gains tax even if the child had no plans to otherwise sell that stock.


Since this change would affect everyone whose parents die leaving them more than $100,000 in assets (other than a residence), it seems this would be the President's new definition of "wealthy".

As another example, if a parent's house is worth $750,000, when the parent dies, the child would have to pay an immediate capital gains tax on the value in excess of $250,000. This might require the house to be sold or mortgaged to pay this phantom capital gains tax.


Remember, the capital gains tax proposals discussed above would also apply if you make a gift to your child. So if you gift your house to your child (because you can no longer live there) and the house has a value of $750,000, your child would have to pay a capital gains tax on $500,000, i.e., the difference between the value of $750,000 and the $250,0000 exclusion).


While we do not expect this proposal to become law at this time, it gives us one more factor to consider when thinking about estate and tax planning. Previous proposals have also included eliminating discounting the value of assets for purposes of gift and estate taxes, as well as eliminating the use of intentionally defective grantor trusts for non-income taxable gifts to children.


Congress and the President are always talking about changes in the estate and gift tax laws. When and if those changes become law and take effect is unknown at this time, but if you are thinking of doing any transfers of assets to your children, including estate tax planning, you should consider doing them as soon as possible under the current gift, estate and capital gains laws.


It is important to remember that some tax proposals have an effective date of when they were proposed, rather than when enacted. This means that if your tax planning is not in place before the proposal is made, it is no longer a viable technique if the proposal becomes law.


If you are thinking about gifting or doing estate tax planning, please do not delay.


Tisser & Standing LLP | (818) 226-9125 | info@tisserlaw.com | http://www.tisserlaw.com
5425 Farralone Ave
Woodland Hills, CA 91367