Estate planning and stepped-up basis

On Behalf of | Aug 16, 2022 | Probate & Estate Planning |

Thinking about your own mortality is not something many people wish to do, yet estate planning for your Pennsylvania property and assets protects your loved ones. One of the most important issues that you and your heirs will need to consider is the tax basis of an inherited asset.

What is a tax basis?

Basis refers to the value of an asset for tax purposes when it is sold. Helping your loved ones reduce taxes on their inheritance is an important step in estate planning, and many assets that are sold after an inheritance can be eligible for a stepped-up basis.

How is the tax basis determined?

The process of determining a stepped-up basis involves the following steps:

  • You purchase an asset for a specific amount
  • Your heirs receive the asset after your death
  • The fair market value on the date of death is more than you originally paid for the asset
  • Your heirs sell the asset at that higher value
  • No capital gains taxes are due

In contrast, if you simply sold the asset yourself, the difference between the original cost and the sales price could count as a taxable capital gain. But when the asset gets passed on as an inheritance, the new value becomes a “stepped up” basis, and that increased value is no longer taxable. This is a reason why gifting the asset during your lifetime may not make sense, as the grantee of the gift will inherit the original tax basis of the asset rather than benefitting from the stepped-up basis as of your date of death.

Not all assets will be applicable for a stepped-up basis, but those with capital appreciation generally are. If your estate planning involves trying to spare future generations from paying high taxes, the following assets may qualify for a stepped-up basis:

  • Real estate
  • Equipment
  • Bonds
  • Mutual funds
  • Businesses
  • Stocks

Conclusion

When planning to pass on the assets for which you have worked hard, you will likely want to prevent your heirs from having to pay high taxes on their inheritance. Proper estate planning can reduce potential taxes. Consult with an experienced estate planning lawyer today to get informed and learn your options.

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