Avoiding The Capital Gains Tax

Imagine you have been working to build your business for the past twenty years and you can now sell it for $20 million.  The prospect of cashing out becomes blissfully overwhelming.

Then you receive the unfortunate news from your tax adviser that although you have paid income tax on your earnings, there will be another tax on the appreciation of the asset values because of those earnings. 

Under our tax system, when the capital build-up is going to be realized by a sale or other transaction, the government wants its piece of the pie as if it were a partner all along.  Just because the government was paid income tax along the way is not enough.  There is no credit for income taxes previously paid against the capital gain taxes to be due. 

The question becomes how to avoid paying capital gains tax and estate tax on money on which you have already paid income tax? 

The answer is to utilize and estate-planning technique by transferring appreciated assets into a trust.  A business owner or investor can establish the trust for the earlier of his death or twenty years.  During his lifetime he can be the trustee.  At his death or end of the term, a minimum of ten percent of the value of the assets donated into the trust must be donated to a charity.  This is basically a toll charge for not paying the capital gains. 

See Denis Kleinfeld, Avoiding Capital Gain Tax on Selling Appreciated Assets, Money News, Oct. 6, 2014.