As you move into your golden years, you’ve probably accumulated assets that have grown in value over time, like real estate, stocks, or a family business. While that’s something to be proud of, it also comes with a not-so-pleasant companion: capital gains tax.
If you plan to pass these appreciated assets to your loved ones, a misstep could leave them with an unnecessary tax bill. Fortunately, with smart estate planning, you can significantly reduce or even eliminate capital gains tax liability.
At Goff Legal, our experienced estate planning attorneys specialize in helping California individuals and couples protect their legacy and avoid capital gains tax traps. Let’s walk through how you can shield your family from capital gains tax while preserving everything you’ve worked so hard to build.
What Is Capital Gains Tax?
Capital gains tax is a tax on the profit from the sale of a non-inventory asset, like real estate or stocks. For example, if you bought a home in Roseville in 1985 for $100,000 and sell it today for $700,000, you may owe tax on the $600,000 gain, unless certain exemptions apply.
What are the capital gains rates? It depends on how long the capital asset was owned. There are two types of capital gains:
- Short-term capital gain: For assets held less than one year (taxed at your regular income rate)
- Long-term capital gain: For assets held longer than one year (typically taxed at 15%–20%, depending on income)
The key concept here is “cost basis“, the original value of the asset when you acquired it. The difference between the sales price and the cost basis is the capital gain.
Why Capital Gains Tax Is a Hidden Estate Planning Threat
Most estate plans focus on avoiding probate or reducing estate tax, but capital gains tax often flies under the radar. Yet, for California families with appreciated assets, capital gains tax can eat up a huge chunk of your legacy.
Imagine this:
- You leave your children a rental property purchased in 1990 for $200,000.
- It’s now worth $1.2 million.
- If your children sell it and the estate plan isn’t structured properly, they could owe capital gains tax on $1 million!
That’s a six-figure tax bill that could’ve been avoided with smarter planning.
7 Smart Estate Planning Strategies to Avoid Capital Gains Tax
Let’s explore strategies that are especially effective for senior California couples.
1. Use the Step-Up in Basis at Death
Here’s some good news: When someone passes away, the cost basis of their property “steps up” to the fair market value at the date of death.
Example: If your home was worth $200,000 when you bought it and $900,000 when you passed, your heirs’ cost basis becomes $900,000. If they sell the home at that price, there’s no capital gains tax.
Planning Tip: A well-drafted living trust can ensure the proper application of the step-up in basis, especially important for community property couples in California, where both spouses can receive a double step-up.
2. Avoid Joint Tenancy with Children
It’s tempting to add your children to your home’s title for “convenience.” But that can trigger capital gains problems.
When you add a child as a joint owner, you’re giving them a gift of your current basis, which means they won’t get a full step-up at your death.
Better Approach: Hold property in a revocable living trust. It keeps ownership clear, maintains step-up benefits, and avoids probate.
3. Gift Assets Strategically (Not Too Soon!)
While gifting assets during your lifetime might seem generous, it may backfire tax-wise.
When you gift appreciated assets, the recipient receives your original cost basis. If they sell, they’ll pay capital gains on the full gain since your original purchase.
Alternative: Consider waiting until death, so beneficiaries get a step-up in basis. Or explore charitable remainder trusts or qualified opportunity funds if you want to gift now but minimize taxes.
4. Set Up a Revocable Living Trust
One of the smartest tools in your estate planning toolbox is a revocable living trust. Not only does it help you avoid probate, but it also ensures that your assets are handled in a way that preserves capital gains tax advantages.
When structured properly, a revocable living trust can:
- Maintain community property character for married couples in California
- Allow for a full step-up in basis when one spouse passes (not just on half the property)
- Keep your affairs private and out of the court system
Many couples in California don’t realize that how assets are titled, even within a trust, can impact whether a full or partial step-up applies. That’s why it’s essential to work with an estate planning attorney who understands California’s unique community property laws.
At Goff Legal, we craft custom revocable trusts that:
- Maximize capital gains protection
- Preserve community property status
- Give your heirs the tax advantages they deserve
5. Plan Carefully When Selling a Primary Residence
If you’re thinking of downsizing, remember this:
- Married couples can exclude up to $500,000 in capital gains from the sale of a primary residence.
- Singles can exclude up to $250,000.
To qualify:
- You must have lived in the home for 2 of the last 5 years.
- You must not have claimed the exclusion on another home in the last 2 years.
Planning Tip: If one spouse has passed and the home is sold within 2 years, the survivor may still qualify for the full $500,000 exclusion. Don’t wait too long to act.
6. Use a Charitable Remainder Trust (CRT)
If you’re philanthropically inclined, a Charitable Remainder Trust lets you:
- Donate an appreciated asset (like stock or real estate)
- Avoid capital gains tax on the sale
- Receive income for life
- Leave the remainder to a charity
It’s a win-win: you support a cause you care about and reduce taxes on appreciated assets.
7. Work with a Local Estate Planning Attorney
Online documents won’t help you navigate the nuanced tax laws in California. Capital gains planning is complex, and the wrong move can cost your heirs dearly.
At Goff Legal, we:
- Understand local property and tax laws
- Design trusts to preserve step-up basis
- Can coordinate by request with your financial team (CPA, financial advisor, etc.)
- Create estate plans that minimize tax exposure
How These Strategies Work Together: A Real-Life Example
Meet Mark and Diane, a couple in their late 60s from Rocklin.
They bought a rental home in 1992 for $180,000. It’s now worth $950,000. They were thinking of transferring it to their children now to “get it out of their estate.” But that would pass along their low cost basis, exposing their kids to over $150,000 in capital gains tax.
Instead, we helped them:
- Transfer the property into a joint revocable trust
- Ensure the trust includes community property provisions
- Include clear instructions for a full step-up in basis at the first and second spouse’s death
Now, when their children inherit the property, they’ll enjoy a full step-up and can sell it tax-free.
Smart planning made all the difference.
Don’t Let Capital Gains Undermine Your Legacy
Capital gains tax might seem like a distant issue, but if your estate includes real estate, investments, or a family business, the tax implications are very real. The good news? You can take control now with a plan that protects your family and maximizes your legacy.
Goff Legal’s experienced estate planning attorneys help individuals and couples in Placer County and throughout California avoid capital gains tax and navigate estate planning with clarity, compassion, and precision. As a woman-owned, boutique law firm, we pride ourselves on offering personalized guidance; no cookie-cutter plans here!
Contact the Experienced Estate Planning Attorneys at Goff Legal Today
Let’s talk. Schedule a free discovery call today to learn how you can preserve your assets, minimize taxes, and leave your family with peace of mind.
