Passing assets on to family is a great way to transition wealth. But there are caveats, which mainly include large tax bills. If not done right, beneficiaries can be left with a tax bill they cannot pay. That's why proper estate planning is essential.
One tax advantage in wealth transfer is the step-up in basis. But not all assets qualify for this special tax treatment. In this article, we’ll go through assets to be aware of when it comes to qualifying for a step-up in basis.
What is A Step-Up in Basis?
A step-up is a tax benefit component of estate planning. When the owner (also called the decedent) of an asset passes away, the beneficiaries inherit the asset at the market price as of the date the owner passed. Any gain created while the original owner held the asset isn’t taxable.
The step-up in basis applies to capital assets such as stock, mutual funds, collectibles, real estate, and businesses.
To see how this works, let’s look at an example. The following shows the purchase of a capital asset.
Purchase price: $200,000
Price on decedent's death: $300,000
Gain: $100,000
In this case, any beneficiaries inherit the asset at the price of $300,000. No capital gains taxes are owed on this asset at the time of transfer.
The basis is the $200,000 purchase price. It is the original purchase price of the asset. While many assets qualify for a step-up in basis, there are a few that do not.
These Assets Do Not Get a Step-Up in Basis
If you inherit any of these assets, you don’t get the step-up in basis tax advantage.
- Individual retirement accounts such as IRAs and Roth IRAs
- Tax-deferred annuities
- 401(k), 403(b), 457 employer-sponsored retirement plans
- Certificates of deposit
- Pensions
- Money market accounts
Of course, any real estate that was gifted to you before the decedent's passing also does not qualify. There is still value in receiving these assets. However, taxes will need to be paid on any gains.
With proper estate planning, decedents can help ensure that their beneficiaries receive tax advantages on passed-down assets. However, working with an estate tax advisor is best when making such plans.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Hypothetical examples shown are for illustrative purposes only.
