The Basics of Basis - and How it Minimizes Capital Gains Tax

In most cases, when an asset is passed on to a beneficiary, its value is more than when the original owner acquired it. For heirs of individuals who die after 2010, the federal income tax basis of inherited capital-gain assets (such as real estate and stock) can be stepped up to reflect the fair market value at a decedent’s date of death.  Put differently, a step-up in basis means the value of an appreciated asset is readjusted at a higher market value for tax purposes upon inheritance versus what the value of the asset was when originally purchased.  Hence, an asset's basis is its fair market value on the day of the original owner's death.

To illustrate this point, imagine leaving stocks you’d purchased for $2 each in 1968 to your Granddaughter. Upon your death, the stocks are worth $20 each. For tax purposes, if the stocks receive a step-up in basis, your Granddaughter’s cost basis for the shares would become the current market price of $20. So, any capital gains tax she pays in the future will be based on the $20 adjusted basis, not on the original purchase price of $2.

This means heirs won't owe any federal capital gains taxes on asset appreciation that occurs through the date of death -- as long as that date is after 2010. This is important because, in the past, many heirs encountered larger-than-expected capital gains taxes upon sale of inherited assets.   This was due to the requirement that the basis of such assets be carried over from the decedent to the heir.

When you retain an MH attorney to administer a trust, the experienced Estate Administration team completes all research with respect to estate assets.  This includes gathering asset values at date of death and assembling the information in a manner accepted by the IRS in order to receive a step-up in basis.

To meet with an MH attorney for more information, contact our office today at 888.222.1328.

Contributed by MH Phoenix Estate Planning Attorney Andrea Claus

What the Attorneys of Morris Hall Can Do For You:
The attorneys at Morris Hall have 100’s of years of combined experience ensuring that families’ assets are protected from probate, unnecessary taxes, creditors, ex-spouses and Medicaid spend-down.  The attorneys also help those in Arizona and New Mexico to apply for and receive Medicaid assistance and Veterans Benefits.  Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.