Understanding Step-Up in Basis

A Crucial Tool for Estate Planning

By: Jacquel ine R. Bowden Gold, Miami Estate Planning Attorney

Step-up in basis is a tax provision in the United States that can significantly benefit those who inherit assets. By resetting the value of an inherited asset to its fair market value at the time of the decedent’s death, this provision can potentially minimize capital gains taxes when the asset is sold. Understanding how step-up in basis works and how to effectively receive it can be crucial for effective estate planning and maximizing the value of inherited assets.

What is Step-Up in Basis?

The “basis” of an asset is essentially its original value for tax purposes. When you sell an asset, the capital gains tax you owe is calculated based on the difference between the sale price and the basis. Normally, if you purchase an asset, your basis is what you paid for it. However, with a step-up in basis, the value of an inherited asset is “stepped up” to its market value at the time of the original owner’s death. This adjustment can significantly reduce or even eliminate capital gains taxes if the asset is sold shortly after being inherited.

For example, if your grandmother bought stock for $10,000 that is worth $50,000 at her death, and you inherit it, your basis is stepped up to $50,000. If you sell the stock for $55,000, you only pay capital gains tax on the $5,000 gain, not the $45,000 increase from the original purchase price. Inheriting the asset is very important as gifts during life causes you to lose this benefit.

Top Ways to Receive Step-Up in Basis

Inheritance Through a Will or Trust:

The most common way to receive a step-up in basis is by inheriting assets through a will or trust. When a person passes away and leaves assets to heirs, those assets generally receive a step-up in basis. A revocable living trust can be an effective estate planning tool, as it allows the assets to pass to beneficiaries without going through probate while still receiving the tax benefits of a step-up in basis. This is true for a wide range of assets, including stocks, real estate, and personal property.

Myth: You must inherit through a Trust to receive step-up. As exemplified below there are other ways not using a trust to receive a step-up.

Jointly Held Property:

If you own property jointly with another person (such as a spouse) and one owner dies, the surviving owner may receive a step-up in basis on the deceased’s portion of the property.

Transfer on Death Accounts (TOD):

Certain financial accounts, such as stocks and brokerage accounts, can be set up with a transfer on death designation. Upon the account holder’s death, the assets transfer directly to the named beneficiary and receive a step-up in basis.

Planning for Step-Up in Basis

While step-up in basis can offer significant tax advantages, it’s essential to incorporate this strategy into a broader estate plan. Here are some tips for effective planning:

Consult with Estate Planning Professionals: Work with estate planning attorneys and financial advisors to ensure your assets are structured in a way that maximizes the benefits of a step-up in basis.
Keep Detailed Records: Maintain comprehensive records of the purchase prices and dates of acquisition for all your assets. This information is crucial for accurately calculating the basis and ensuring proper application of the step-up.
Consider the Implications of Gifting: While gifting assets during your lifetime can reduce the size of your taxable estate, it can also eliminate the potential for a step-up in basis. Carefully weigh the benefits and drawbacks before transferring assets.
Stay Informed About Tax Laws: Tax laws are subject to change, and proposals to modify or eliminate the step-up in basis have been discussed in recent years. Staying informed and being prepared to adjust your estate plan is essential.

Conclusion

Step-up in basis is a powerful tool in estate planning, offering substantial tax benefits to heirs. By understanding how it works and incorporating it into your estate strategy, you can help ensure that your loved ones receive the maximum value from the assets you leave behind. Working with a knowledgeable Miami Estate Planning attorney and keeping up with legislative changes will further enhance your ability to effectively utilize step-up in basis in your estate plan.

This article is intended for informational purposes only and does not cover the entirety of Step-Up in Basis. It is important you consult with a Miami Estate Planning attorney if you have questions regarding receiving a Step-Up in Basis. Jacqueline R. Bowden Gold, is an attorney with Rarick & Bowden Gold, PA. To consult with Ms. Bowden Gold you can contact our office at (305) 556-5209 or by email JBowden@raricklaw.com.