Dying for a Tax Benefit?

Whether you are engaging in estate planning or administering the estate of a decedent, understanding the concept of stepped-up basis is crucial. A step-up in basis, also known as stepped-up basis, takes into consideration the fair market value of an asset from when it was inherited, rather than when it was purchased, and can help beneficiaries minimize taxes on the assets they inherit.

For example, let’s say that John purchased 100 shares of FF Co. stock at $50 a share. After John’s death, Kathleen inherits the stock from John. At that point, the stock’s price has climbed to $100 a share. When Kathleen decides to sell the shares five years after inheriting them from John, the stock’s price sits at $120 per share. Thanks to the step-up in basis, Kathleen will pay capital gains taxes solely on the $20-per-share difference between when she inherited the stock ($100 per share) and when she sold it ($120 per share). Without the step-up in basis, Kathleen would end up paying capital gains taxes on the $70-per-share difference between the price John originally paid for the stock ($50 a share) and the sale price ($120 per share).

Another important illustration of this concept relates to inheriting real property. For example, if a beneficiary in New York inherits real property with a significant appreciation in value since the decedent’s acquisition, the stepped-up basis allows the beneficiary to establish a new cost basis equal to the property’s fair market value at the time of inheritance. This adjustment can result in substantial tax savings when the real property is eventually sold.

Understanding the concept of stepped-up basis is critical to achieving a comprehensive estate plan or properly administering an estate.