Many people seem to believe that the term “estate planning” doesn’t apply to them. To those people, only the rich and famous need to worry about intricacies of estate planning, because only they have estates worth making a plan for. That’s simply not true. Average Americans from California to New York can profit by thinking ahead toward avoiding probate. One way to do that is to establish a trust.
Trusts are a way of transferring assets to someone else in a tax-efficient manner. Simply stated, by placing assets into a trust, California residents can avoid having their life’s savings depleted by taxes. Take for an extreme example the estate of the late Steve Jobs.
Jobs’ 138 million shares in Disney and 5.55 million shares in Apple were reportedly moved into a trust for his wife as his health worsened. There are several reasons to do this. First, by putting the assets into trust, Jobs’ wealth can be distributed over time instead of all at once by order of a will. Another reason this may have been a smart move was that it affords his family the luxury of avoiding probate. Had he instead sold his holdings the day before he died, he would have registered a gain of $5.78 and would have been taxed $867 million.
By law, the trust can sell shares and incur taxes only on the appreciation since Jobs’ death — about $338 million. If he had died in 2010, his heirs would have had to pay capital gains tax on his entire investment profit upon the sale of his shares. There was no estate tax at the time. Jobs’ was survived by his wife and four children.
Jobs’ heirs may sell the Apple and Disney shares to avoid the $867 million in capital gains taxes. The capital gains tax is about to rise to 20 percent in 2013, though it is now 15 percent. That five percent increase could equal quite a lot on estates as big as Jobs’. High-income Americans will also be subject to a 3.8 percent tax on unearned gains.
Estate planning can be very complex, especially with complex assets. There are options for those with a modest estate as well as for people like Jobs. The law allows for ways to protect one’s assets and ensure they aren’t unnecessarily diminished by taxes and probate fees.
Source: The San Francisco Gate, “Buffett-Beating Gains Cue Jobs Heirs to Sell Apple, Disney: Tech,” Ronald Grover and Peter Burrows, Nov. 30, 2011