Ways to Minimize Taxation on Highly Appreciated Assets

The value of highly appreciated assets can exceed both their taxable and book values. Learn more about minimizing taxation and how these assets generate capital gains.

Capital gains taxes can take a massive bite out of the returns on highly appreciated assets. Capital gains, of course, are the amount by which a capital asset has increased in value vs. its original purchase price at the time of sale. But that last bit is key: capital gains aren’t realized until the asset is sold.

Those who chose to sell in 2019 would have faced a long-term (assets held for more than a year) capital gains tax of either 15 or 20 percent, at a minimum of $39,375 and $434,550 of realized capital gains, respectively (for unmarried filers). There is also an additional Net Investment Income Tax of 3.8% designed to fund the Affordable Care Act. It applies to “the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.”

Death and taxes may be inevitable, but there are ways for wealthy individuals seeking to realize capital gains to minimize tax impacts—and simultaneously help others while helping themselves.

Choosing a charitable remainder trust

This may be a way to avoid capital gains tax altogether while having a positive impact on the causes of your choice. Establishing a charitable remainder trust (CRT) by placing assets into it protects the assets from creditors and will allow for an immediate charitable income tax deduction on the initial donation.

The CRT then sells the asset(s) at full market value and incurs no capital gains tax. The trust takes the proceeds from that sale and reinvests them into other income-producing assets. This will benefit the chosen cause and generate a lifetime income stream for the trust’s creator(s), or for another party they decide to name. This income may take two forms:


The first form of income is fixed annual income; in this case, the proper term for the trust would be a Charitable Remainder Annuity Trust (CRAT). The second is as a fixed percentage of the assets in the trust, making it a Charitable Remainder Unitrust (CRUT). The latter is prone to lesser payouts in a “bad” year, as the value of the assets in the trust is reevaluated annually. But as the worth of those assets grow—especially in particularly “good” years—the improvement of the income stream can be considerable.

Further, since the asset(s) were placed into a trust and therefore removed from the creator’s estate, they also avoid estate taxes upon the creator’s death. When a death occurs, whatever remains in the trust goes to the chosen charity—hence the “remainder” in the name of the trust.

There is, of course, the crucial question of which party to name as the trustee. Many choose a third-party institution, while others may prefer a family member or friend. Whichever decision works best will depend on an individual’s goals and situation.

Capital gains budgets, trimming assets, and reassessing your zip code

Holding onto assets as they continue to generate new wealth is the purpose of investing. But a tipping point may eventually be reached where the asset holder has accrued enough gains to find themselves in a higher tax bracket.

Selling may incur taxes high enough to mitigate gains significantly. Creating a specific budget can allow you to steadily absorb capital gains and better handle the associated taxes.

Trimming a portfolio of a certain proportion of highly accumulated assets on a planned schedule can be very useful in controlling capital gains risk exposure. Selling off assets may also be necessary to accomplish diversification of the portfolio. Wealthy individuals may also want to consider a change in address, since neither Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming levy income tax.

Fortunately, when it comes to passing along wealth to beneficiaries, a step up in the basis—“the amount of a taxpayer’s investment in property for tax purposes”—can soften the tax hit:A step-up in basis is the readjustment of the value of an appreciated asset for tax purposes upon inheritance.

The higher market value of the asset at the time of inheritance is considered for tax purposes. When an asset is passed on to a beneficiary, its value is typically more than what it was when the original owner acquired it. The asset receives a step-up in basis so that the beneficiary’s capital gains tax is minimized. A step-up in basis is applied to the cost basis of property transferred at death.

Gifts to family members (or others) in lower tax brackets

You can gift up to $15,000 annually to family members or other favored individuals tax-free, or double that figure if you and your spouse elect to give.

Minor-aged children or grandchildren are ideal candidates for this kind of tax-free giving, provided the amount given is below the annual gift tax exclusion threshold (which remains $15,000 in 2020). The exclusion isn’t cumulative. So, if you have three children or grandchildren, then they may each be given up to $15,000 or $30,000 (depending on whether there is a spousal co-contribution).

If you’re concerned about placing wealth in the hands of young beneficiaries, a wealth advisor can help devise a gift scenario that includes stipulations for spending, including when the funds can be used.

The Lindberg and Ripple team can help you devise a plan to handle highly appreciated assets while minimizing taxes. Connect with us at the link below to learn more.

Lindberg & Ripple offers customized wealth management, investment, and insurance solutions to wealthy families and successful businesses. We help our clients craft a comprehensive wealth planning model to achieve their financial goals with minimum fuss and maximum savings. To learn more, connect with us.

This information is obtained from sources that are believed to be reliable but we make no guarantees as to its accuracy. This material is for educational purposes only. Educational material should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor and plan provider. By accessing any links above, you will be connected to third party web sites. Please note that Lindberg & Ripple are not responsible for the information, content or product(s) found on third party web sites. Investments in securities involve risks, including the possible loss of principal. When redeemed, shares may be worth more or less than their original value. Diversification does not ensure a profit or protect against loss in a declining market. Securities and Investment Advisory Services Offered Through M Holdings Securities, Inc. A Registered Broker/Dealer and Investment Adviser, Member FINRA/SIPC. Lindberg & Ripple is independently owned and operated. # 3330726.2