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CAPITAL GAINS TAX: ADVANCED CONCEPTS When planning your estate, you must, unfortunately, be cognizant of several taxes and should be familiar with means of avoiding them. In addition to federal, state and local death taxes and to Generation Skipping Transfer Tax, the sophisticated planner will benefit by an understanding of the capital gains tax that is levied by the federal government and by many state governments. The capital gains tax is actually an income tax applied to capital gains ... or, income tax on the gain. If you bought a stock in 1975 for $100 and its value increased at 7.2% per year for 20 years, it would have been "worth" $400 by 1995 ... and you would have, in 1995, an unrealized capital gain. If you sold at the $400 figure, you would have realized a capital gain of $300 ... and that gain would have been subject to the tax. Remember, as long as you didn't sell, you have not realized a capital gain ... and, hence, you have not experienced a taxable event. What if inflation had run at 3.6% per year during those 20 years. In that case, one half of your gain would be "real" and one half would be "false." The latter half would have been inflated value instead of real value. While figures may not completely and adequately describe this taxation of phantom value, the point is quite simple. The tax is applied to both real and to phantom gain. One outstanding means of avoiding capital gains tax is to use a Charitable
Remainder Trust. This trust avoids the tax and provides income to the
donor or donors for life and benefits |
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