WHAT IS 
BASIS STEP-UP?

WHAT IS BASIS STEP-UP?

 

Many people focus on estate taxes when discussing estate planning. However, for most families today, capital gains taxes are a far more significant concern.

 

One of the most valuable tax benefits available under current law is known as the basis step-up.

 

Understanding this concept can dramatically affect how much your beneficiaries ultimately keep when they inherit property.

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Quick Answer

 

When a person dies owning appreciated assets, the tax basis of those assets is often adjusted to their fair market value as of the date of death.

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This adjustment is commonly called a step-up in basis.

 

As a result, beneficiaries may be able to sell inherited assets with little or no capital gains tax on appreciation that occurred during the decedent's lifetime.

 

For many families, the basis step-up can save far more in taxes than any estate tax planning strategy.

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WHAT IS TAX BASIS?

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Tax basis is generally the amount invested in an asset for income tax purposes.

 

It is often:

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• The purchase price;

• Plus certain improvements;

• Minus certain adjustments.

 

When property is sold, capital gains taxes are generally calculated based upon the difference between:

 

Sale Price minus Tax Basis

 

Example

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Mary purchases stock for $10,000.

 

Over time, the stock grows to $100,000.

 

Mary's basis remains approximately $10,000.

 

If she sells the stock during her lifetime for $100,000, she may recognize approximately $90,000 of capital gain.

 

When Mary dies owning the stock, a basis adjustment may occur. If the stock is worth $100,000 on the date of death, the basis may increase from:

 

$10,000

 

to

 

$100,000

 

This is known as a step-up in basis.

 

If Mary's children later sell the stock for $100,000, there may be little or no capital gain recognized.

 

The appreciation that occurred during Mary's lifetime effectively disappears for income tax purposes.

 

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WHY IS BASIS STEP-UP SO IMPORTANT?

 

Because capital gains taxes can be substantial.

 

Many families own:

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• Real estate;

• Investment accounts;

• Closely held businesses;

• Rental properties;

• Appreciated stock.

 

These assets may have appreciated significantly over many years.

 

Without a basis adjustment, beneficiaries may inherit a substantial built-in tax liability.

 

A step-up in basis can significantly reduce or eliminate that liability.

 

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WHICH ASSETS RECEIVE A STEP-UP IN BASIS?

 

The rules vary depending upon:

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• The type of asset;

• Ownership structure;

• Whether the asset is included in the taxable estate;

• Applicable federal tax law.

 

Certain assets may receive a full adjustment, while others may not.

 

Because these rules can be complex, professional guidance is often important.

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CAN LIFETIME GIFTS CAUSE PROBLEMS?

 

Sometimes.

 

Many people assume they should simply transfer appreciated property to children during life.

 

However, gifts generally carry the donor's existing basis.

 

Example

 

John owns stock worth $500,000 with a basis of $50,000.

 

If John gives the stock to his daughter during his lifetime, she generally receives John's $50,000 basis.

 

If she later sells for $500,000, she may recognize approximately $450,000 of gain.

 

Had she inherited the stock after John's death, a basis adjustment may have substantially reduced that tax burden.

 

This is one reason why gifting strategies should be evaluated carefully.

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HOW DO TRUSTS AFFECT STEP-UP IN BASIS?

 

Trust planning can significantly affect basis outcomes.

 

Some trusts are designed to preserve opportunities for basis adjustment at death.

 

Others may inadvertently eliminate those opportunities.

 

Modern estate planning often focuses on balancing:

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• Asset protection;

• Estate tax planning;

• Income tax planning;

• Basis optimization.

 

For many families, basis planning has become one of the most important aspects of sophisticated estate planning.

 

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TAX BASIS OPTIMIZATION PLANNING

 

Tax Basis Optimization Planning refers to strategies designed to preserve or enhance basis adjustment opportunities.

 

These strategies may involve:

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• Trust design;

• Powers of appointment;

• Trust protector provisions;

• Asset allocation decisions

• Ownership structures.

 

The objective is often to maximize after-tax wealth for future generations.

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BENEFITS OF ESTATE PLANNING

 

A properly designed estate plan can help families:

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• Preserve basis adjustment opportunities;

• Reduce future capital gains taxes;

• Coordinate trusts and beneficiary designations;

• Protect assets for future generations.

 

For many families, income tax planning is just as important as estate tax planning.​