Stepped Up Basis – “Need to Know” Info on Inheriting Assets

Photo by Chris Nguyen on Unsplash

Only two things are certain right?  You know…death and taxes!  When a death occurs the last thing on most people’s minds are taxes, but there are some very important steps that need to be addressed fairly quickly.  Most can wait, but the most important thing to do involves a term called “Stepped Up Basis.” which is a concept than could potentially cost or save the beneficiaries large sums from their inheritances.

I get a lot of questions from beneficiaries and trustees about the assets they are inheriting and the tax-ability of them.  I want to focus on the stepped up basis today though because it is easily the one that can save most people the most money.

To understand “Stepped Up Basis” you should have a basic knowledge of the term Basis.  In general, the basis is the cost or acquisition price of an asset.  We always keep tract of basis because when you sell an asset, you only pay taxes on the difference between the sales price and the basis.  For instance, if you sell a house, you pay taxes on the sales price less the cost of the house and any permanent improvements you made to it.  Whenever you sell a company’s stock you have either a gain or loss based on the difference between what you sold for and your basis.  The same goes for collectibles, antiques and businesses.  These are all considered appreciating assets.

When someone dies, the inherited asset’s basis is now “stepped up” to its value at the owners date of death.   That is a substantial benefit when selling appreciating assets.  For example, if your friend bought a property for $50K in the 1960s, and its worth $500K the day you inherit it, your taxable income on the house would be nothing ($500K potential sales price – $500K basis).  If your friend had sold it the day before their death, there would be a taxable gain of $450K ($500K sales price – $50K basis).  BIG difference.  What if you don’t sell it for a while, Say you sell it a year after inheriting it for $520K.  Your taxable gain would only be $20K based on the step up in basis of $500K.

So, as close to the date of death as possible, you should request a value for all of the appreciating assets.  That will include the stocks, bonds and mutual funds as well as the stock of their business or rental properties.

The concept of Stepped Up Basis should also be considered when making personal financial plans and succession plans pre-death.  This legal concept has been used to help evenly distribute assets to beneficiaries, or in decisions of whether to put kids on title to properties they might inherit in the future, and a variety of other estate planning considerations.  This is not a concept merely for the rich as it applies to virtually everyone.

Remember, these posts happen based on real life conversations with clients, friends and associates.  If you have any questions please comment or contact us, and as always, consult a professional before making any major estate planning decisions.

We’ll chat again soon.




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