Understanding Step-Up in Basis
In a carefully structured estate plan, certain assets — such as stocks, bonds, and real estate — may acquire a stepped-up basis when the asset is inherited, resulting in considerable capital gains savings if the asset is sold by the beneficiary. However, the step-up in basis is not automatic. To take advantage of the benefits of the tax rules for a step-up in basis for inherited assets, it is essential to work with an experienced estate planning attorney.
The Importance of Asset Basis in Estate Planning
Assets that you own have a basis attached to them, which is used to calculate the amount subject to capital gains tax if you sell the asset. The basis of an asset typically is the original cost or purchase price paid for the asset. If you buy an asset and later sell it, the capital gains amount for tax purposes is calculated by subtracting the original basis from the sale price of the asset. For example, if you buy stock for $100,000 and later sell the stock for $500,000, you have a capital gain for tax purposes of $400,000, determined by subtracting the basis of $100,000 from the sale price.
The basis of an asset is also important when a beneficiary inherits an asset on your death. If a beneficiary sells an asset after inheriting it, the basis of the asset will be used to calculate the capital gains tax owed by the beneficiary. The beneficiary’s basis is determined by how it is passed along to the beneficiary in your estate plan.
In some cases, the beneficiary’s basis may be the same as your original basis for an asset. However, federal tax laws provide an estate planning tool that enables you to provide a step-up in basis for the beneficiary to the fair market value on the date of death. For assets that appreciated in value and have unrealized capital gains, the step-up in basis can make a substantial difference in the beneficiary’s taxable capital gain and tax liability when the asset is sold.
Stepped-Up Basis For Assets in Your Estate Plan
Minimizing taxes for an estate and for assets included in the estate is an important estate planning goal. When you create an estate plan, using the federal tax rules to provide a step-up in basis for assets can make a substantial difference in tax liability for your beneficiaries.
Assets do not automatically receive a stepped-up basis when they are inherited. Your estate plan must be carefully structured with assistance from a knowledgeable estate planning attorney to take advantage of the federal tax rules that provide a stepped-up basis for inherited assets. Your attorney helps you structure your estate plan to preserve assets, provide a step-up in basis for beneficiaries, and take advantage of the tools available under the complex federal tax rules.
This example illustrates the significance of these rules: During his life, Mr. Smith bought stock in a well-known company for $100,000. On his death, the stock was worth $1.2 million. His son inherited the stock. If the estate plan was structured to provide a step-up in basis, the son’s basis for the inherited asset would be $1.2 million. If, on the other hand, the estate plan is not properly structured to provide for a step-up in basis, the son’s basis would be $100,000. If the son sells the stock, the difference in basis — $100,000 (original basis) vs. $1.2 million (stepped-up basis) — makes a significant difference in the amount the son may have to pay in capital gains tax.
A step-up in basis for an inherited asset can effectively wipe out tax liability of a beneficiary for unrealized capital gains. For some assets, the tax savings can be substantial. Generally, the tax advantages can be protected in a carefully structured trust. However, especially in light of a new ruling on this issue by the Internal Revenue Service in March 2023, it is critical to have guidance from an experienced estate planning and trust attorney in properly structuring an estate plan for a step-up in basis of inherited assets.
Talk With a Georgia Estate Planning Attorney
In our Cartersville estate planning practice at Asset Protection & Elder Law of Georgia, we help clients with all aspects of creating and maintaining an estate plan. We work with clients to ensure that their estate plan minimizes taxes and takes full advantage of beneficial federal tax rules, including those that apply to a step-up in basis for inherited assets.
We provide legal services to clients throughout the communities northwest of Atlanta, including in Bartow County, Cobb County, Cherokee County, Gordon County, Floyd County, and Paulding County. Call us at (770) 382-0984 or contact us through our online form.
