Feb 6, 2018

The Step-Up in Basis Remains, For Now

There was talk last year in Congress about doing away with the step-up in basis for inherited assets. My office has recently received several inquiries regarding whether the Tax Cuts and Jobs Act eliminated the step-up. Happily, it did not. And that's good news for anyone who wants to pass along highly appreciated assets to your loved ones. 

If you're wondering how the step-up works, here's a primer:

When you give away a highly appreciated asset, the recipient must pay capital gains taxes on the asset when he/she sells it. (No income tax is due on the gift, however). If you give it away during your lifetime, the recipient will owe capital gains tax based on the original cost basis. For example, let's say you bought stock in Company XYZ  in 1970 for $200 and now you transfer it to your son. If he then sells the stock for $1,000, he will owe capital gains tax on  $800 (the difference between the sales price and the original cost basis: $1,000 - $200).

If on the other hand your son inherits the stock from you at your death, the stock gets a step-up in basis. This means that for tax purposes, the value of the gift is pegged to its value on the date of death, not on its original cost basis. So, if the stock is worth $900 when he inherits it and when he sells it is is worth $1,000, capital gains will be due on only the $100 difference (the difference between the sales price and the step up in basis: $1,000 - $900).

You can see why we generally advise clients who wish to pass along highly appreciated capital assets to loved ones to avoid doing so during their lifetimes and instead, leave the asset to loved ones through their estate plan. Of course, every situation is different and you should consult with your own estate planning attorney as to the best option for your circumstances. 

Another reason one must be very careful about giving gifts during one's lifetime is the possible negative impact on Medicaid eligibility. 

Contact the Karp Law Firm for advice on how to handle these issues!

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