What are the key estate planning terms?
Estate planning can feel intimidating at the start, but once you know the basics it becomes much more manageable. Here are two key terms you should know.
Income Tax Basis
“Basis” is a concept that is important in determining the tax you owe when you have a profit or a loss on a transaction. Your “cost basis” in an asset is the amount you paid for it plus any relevant costs and fees. For example, if you bought a home for $200,000 and there were settlement and other fees at closing that came to $1,000, your cost basis would be $201,000. If you inherit or receive an asset as a gift, your basis is the fair market value of that asset.
Your basis may be reduced by factors like depreciation and it may increase due to improvements you’ve made to the asset, among other factors.
When you sell an asset, your basis is used to determine your capital gain on the sale, which could be taxable. For example, say your basis in your home is $200,000, then you sell it for $440,000. Your capital gain is $240,000, or the amount of your profit on your house ($450,000 minus $200,000). Under the tax laws (as of 12/15/2017), you can exclude up to $250,000 of your capital gain from your income. Since your taxable capital gain is less than $250,000, you will not have to pay any capital gains tax on this sale.
The income tax basis is also important when you receive a gift. Generally, your basis in an asset you receive as a gift is the same as it was for the person who gave it to you. If you inherit an asset, your basis is generally the fair market value of the property. If you sell the property, your basis will determine whether you have a capital gain or loss to report on your tax return.
Power of Attorney vs. Durable Power of Attorney
When you give someone your power of attorney, you give them the right to act on your behalf. You may authorize them, for example, to manage some or all your business affairs, sign legal documents or make charitable gifts for you.
A durable power of attorney is valid if you become incapacitated, while a power of attorney is not. A durable power of attorney gives someone the authority to make financial, business or legal decisions if you cannot make them yourself. A medical power of attorney, also known as a durable power of attorney for health care, names someone who will make medical decisions for you if you cannot.