Tax Basis is Important in Modern Estate Planning

By Mary E. Vandenack.  In 2012, the federal estate tax exemption increased to $5.12M adjusted for inflation ($5.43M in 2015). Such exemption applies to life gifts or death transfers. Skilled practitioners can drive a mack truck through the lifetime exemption. Thus, for most individuals, the federal estate tax can be avoided.

For estates of $5,430,000 or less ($10,860,000 for married couples), income tax planning has become significant in tax reduction. (For estates in excess of one exemption, especially if the estate is likely to grow, federal estate tax planning does remain important.)  One income tax consideration is the step-up in basis received at the date of death of the decedent.  By way of example, assume Jim Shelton purchased 1 share of Y Co. stock in 1995 for $10, that is his tax basis in the stock. If that share of Y Co. stock is now worth $5,000 and Jim sells the stock while he is alive, Jim will have capital gain of $4,990.  If instead, Jim dies, his heirs get a step up in basis to the fair market value as of the date of death. If the share of Y Co. stock is worth $5,000 on the day Jim dies, then his heirs can sell the stock the next day and have no gain.

Step-up in basis, along with many other income tax planning tools, should be considered in the modern estate plan.

© 2015 Houghton Vandenack Williams

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