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Estate Planning: a Tax Rule You Should Know About

On Behalf of | Oct 6, 2017 | Estate Planning

Batson Nolan explains how proper estate planning can save your family thousands of dollars.

Due to Federal Income Tax and Federal Estate Tax, it is often joked that the government gets the last laugh by taxing your assets even after you’ve already passed. However, an often times unknown, but very advantageous tax rule exists within the confines in estate planning. This tax benefit, known as the “step-up basis” could save your family thousands of dollars in tax savings. Here’s how it works:

Tax Basis.

Generally, when someone buys a piece of property, the price they pay for it or the cost of such property is referred to as the “basis” in that property.  Many years later, when that property is sold the IRS will tax the difference of the fair market value of such property—generally what the property was sold for—and the seller’s basis in the property. For example, if a buyer buys a piece of property in 1985 for $100K and then sells that property in 2017 for $200K, then the IRS would tax the seller on the difference of $100K. This tax is referred to as capital gains tax for income tax purposes.

Stepped-up Basis.

However, when someone acquires land by devise, bequest, or inheritance, they can take advantage of a stepped-up tax basis. So, using the example above, if the buyer purchased property in 1985 for $100K and left his property, which had appreciated to $200K by 2017, to his daughter, then his daughter would take a $200K basis in said property, and thereby avoid being taxed on the $100K in appreciation. Thus, this is a huge tax benefit that is critical when planning one’s estate.

How do I ensure my family is taking advantage of this savings?

  • First and foremost, if a decedent leaves you property, whether by will or through trust, it is a good idea to file an Estate Tax Return Form 706. Even if the estate you are inheriting from is not required to file a Federal Estate Tax Return (i.e. an individual’s gross estate is not worth more the $5.49 million in 2017), it is still beneficial to do so in order to lock in the date-of-death fair market values of each estate asset, including the property you inherited. Thus, filing the Form 706 will ensure that if there were a dispute to ever arise regarding the basis in your property, the new stepped-up basis in that property would be clearly indicated on the decedent’s Form 706.  If a Federal Estate Tax return is not filed, the beneficiaries may use an appraisal of the property done at or near the time of the decedent’s death or use the county tax appraised value.
  • Next, when you meet with your estate planning attorney, make sure you clearly identify the assets of your estate and the potential for such assets to receive a stepped-up basis upon your passing.

Here is an example of a Stepped-Up Basis:

  • Recently, a couple came into our office to receive estate planning advice. The husband was a owner of a small medical business and was contemplating putting his wife on the title of building in which the business was located.
  • The wife lacked the licensure and certificates to participate in this business, but husband wanted to put his wife’s name on the property to ensure that this property would pass to his wife immediately upon his death.
  • However, in this particular situation, the building had appreciated significantly since the husband had purchased it.
  • If the husband had added the wife’s name to the property as joint owners, the wife would not have been able to take full advantage of the stepped-up tax basis upon her husband’s passing.
  • Thus, we advised our clients, that the husband should remain the sole owner of the building, thereby allowing the wife to receive stepped-up basis upon her husband’s passing.
  • By virtue of the stepped-up basis, the wife will be able to avoid a significant capital gains tax on the property.

Batson Nolan PLC can help you plan now to protect the future of your assets. Contact one of our knowledgeable estate planning attorneys today, and they will handle your end-of-life legal matters with the utmost dignity and integrity. You may also call us to arrange a free initial consultation.