What’s the Difference Between Capital Gains and a Dividend? – Annapolis and Towson Estate Planning

Investopedia published an article that asks “Capital Gains vs. Dividend Income: What’s the Difference?” The article looks at the differences between capital gains and dividend income, and their tax implications.

Capital is the initial sum invested. A capital gain is a profit you get when an investment is sold for a higher price than the original purchase price. An investor doesn’t realize a capital gain until an investment is sold for a profit.

On the other hand, dividends are assets paid out of the profits of a corporation to the stockholders. The dividends an investor receives aren’t capital gains. This is treated as income for that tax year.

A capital gain is the increase in the value of a capital asset—either an investment or real estate—that gives it a higher value than the purchase price. A capital loss happens when there’s a decrease in the capital asset value as compared to the asset’s purchase price. There is no capital loss until the asset is sold at a discount.

A dividend is a “reward” or “bonus” that’s given to shareholders who’ve invested in a company’s equity. It is usually from the company’s net profits. Most profits are kept within the company as retained earnings, representing money to be used for ongoing and future business activities. However, the rest is often disbursed to shareholders as a dividend.

Taxes. Capital gains and dividends are taxed differently. Dividends are going to be either ordinary or qualified and taxed accordingly. However, capital gains are taxed based on whether they are seen as short-term or long-term holdings. A capital gain is deemed short-term if the asset that was sold after being held for less than a year. Short-term capital gains are taxed as ordinary income for the year. Assets held for more than a year before being sold are considered long-term capital gains upon sale. The tax is on the net capital gains for the year. Net capital gains are calculated by subtracting capital losses from capital gains for the year. For many, the tax rate for capital gains will be less than 15%.

Dividends are usually paid as cash. However, they can also be in the form of property or stock. Dividends can be ordinary or qualified. Ordinary dividends are taxable and must be declared as income, but qualified dividends are taxed at a lower capital gains rate. When a corporation returns capital to a shareholder, it’s not considered a dividend. It reduces the shareholder’s stock in the company. When a stock basis is reduced to zero through the return of capital, any non-dividend distribution is considered capital gains and will be taxed as such.

Reference: Investopedia (April 11, 2019) “Capital Gains vs. Dividend Income: What’s the Difference?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys 

Estate Planning Hacks Create More Problems – Annapolis and Towson Estate Planning

The estate planning attorney in this gentleman’s neighborhood isn’t worried about this rancher’s plan to avoid the “courtroom mumbo jumbo.” It’s not the first time someone thought they could make a short-cut work, and it won’t be the last. However, as described in the article “Estate planning workaround idea needs work” from My San Antonio, the problems this rancher will create for himself, his wife, and his children, will easily eclipse any savings in time or fees he thinks he may have avoided.

Let’s start with the idea of putting all the man’s assets in his wife’s name. For starters, that means she has complete control and access to all the accounts. Even if the accounts began as community property, once they are in her name only, she is the sole manager of these accounts.

If the husband dies first, she will not have to go into probate court. That is true. However, if she dies first, the husband will need to go to probate court to access and claim the accounts. If the marriage goes sour, it’s not likely that she’ll be in a big hurry to return access to everything.

Another solution: set the accounts up as joint accounts with right of survivorship. The bank would have to specify that when spouse dies, the other owns the accounts. However, that’s just one facet of this estate planning hack.

The next proposal is to put the ranch into the adult children’s names. Gifting the ranch to children has a number of irreversible consequences.

First, the children will all be co-owners. Each one of them will have full legal control. What if they don’t agree on something? How will they break an impasse? Will they run the ranch by majority rule? What if they don’t want to honor any of the parent’s requests or ideas for running the ranch?  In addition, if one of them dies, their spouse or their child will inherit their share of the farm. If they divorce, will their future ex-spouse retain ownership of their shares of the ranch?

Second, you can’t gift the ranch and still be an owner. The husband and wife will no longer own the ranch. If they don’t agree with the kid’s plans for the ranch, they can be evicted. After all, the parents gave them the ranch.

Third, the transfer of the ranch to the children is a gift. There will be a federal gift tax return form to be filed. Depending on the value of the ranch, the parents may have to pay gift tax to the IRS.  Because the children have become owners of the ranch by virtue of a gift, they receive the tax-saving “free step-up in basis.” If they sell the ranch (and they have that right), they will get hit with capital gains taxes that will cost a lot more than the cost of an estate plan with an estate planning attorney and the “courtroom mumbo jumbo.”

Finally, the ranch is not the children’s homestead. If it has been gifted it to them, it’s not the parent’s homestead either. Therefore, they can expect an increase in the local property taxes. Those taxes will also be due every year for the rest of the parent’s life and again, will cost more over time than the cost of creating a proper estate plan. Since the ranch is not a homestead, it is subject to a creditor’s claim, if any of the new owners—those children —have a financial problem.

We haven’t even mentioned the family business succession plan, which takes a while to create and complements the estate plan. Both plans exist to protect the current owners and their heirs. If the goal is to keep the ranch in the family and have the next generation take the reins, everyone concerned be better served by sitting down with an estate planning attorney and discussing the many different ways to make this happen.

Reference: My San Antonio (April 29, 2019) “Estate planning workaround idea needs work”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

For Immediate Release

Contact: Jane Frankel Sims

410-828-7775

Contact: Frank Campbell

410-263-1667

Sims & Campbell Estates and Trusts

Frankel Sims Law and Holden & Campbell
Merge to Form Sims & Campbell

Firm will offer comprehensive Trusts & Estates services through offices in Towson and Annapolis

TOWSON, Md. (April 26,2019)  Frankel Sims Law and Holden & Campbell have jointly announced the merger of their firms to create a boutique Trusts & Estates law firm providing comprehensive services in the fields of Estate Planning, Estate Administration, Trust Administration and Charitable Giving. The combined firm will be named Sims & Campbell and have offices in Towson, Md. and Annapolis, Md.  Jane Frankel Sims and Frank Campbell will lead and hold equal ownership stakes in the firm.

Sims & Campbell will have 9 attorneys and 15 legal professionals that handle every facet of estate and wealth transfer planning, including wills, revocable living trusts, irrevocable trusts, estate and gift tax advice, and charitable giving strategies.  The firm will focus solely on Trusts & Estates but will serve a wide range of clients, from young families with modest resources to ultra-high net worth individuals.  This allows clients to remain with the firm as their level of wealth and the complexity of related estate and tax implications change over time. 

“By joining forces, we have expanded our footprint to conveniently serve clients in Maryland, D.C. and Virginia” said Jane Frankel Sims.  We are seeing some of the greatest wealth transfer in our country’s history, and we want to continue to be on the leading edge of helping our clients maintain and enhance their family’s wealth.  In addition, we aim to serve our clients for years to come, and the new firm structure will allow Sims & Campbell to thrive even after Frank and I have retired.”    

“Jane and I have always admired each other’s firms and recognized the need to provide even greater depth and breadth of focused expertise to help families amass and protect their wealth from generation to generation,” said Frank Campbell.  “Now we have even greater capabilities to make a real difference for our clients.” 

The Sims & Campbell Towson office is located at 500 York Road, on the corner of York Road and Pennsylvania Avenue in the heart of Towson.  The Annapolis office is currently located at 716 Melvin Avenue, and is moving to 181 Truman Parkway in August, 2019.  For more information, visit www.simscampbell.law.