Valuing a person’s estate when they die can be a complex issue. This is especially true if they have held certain assets for a long time and those assets have realized significant capital appreciation.
Fortunately, most assets in a decedent’s estate receive a step-up in basis at death, meaning their cost basis is reset to the asset's current fair market value. This important provision can save heirs a significant amount of money in capital gains taxes when they decide to sell inherited assets.
The step-up basis tax provision is critical for estate planning and inheritance matters. Let’s take a closer look.
When assets are valued on a stepped-up basis, they are valued at their current fair market value rather than at their value when purchased. This provision applies to many different types of real property, as well as other tangible assets such as mutual funds, bonds, and stocks. Estate planners strive to use the stepped-up basis provision to preserve wealth so heirs receive greater value for certain inherited assets.
This can be especially helpful for assets that have realized significant appreciation over time – but the Internal Revenue Service only considers certain real property assets eligible for a step-up in basis. Here are a few property types that can be stepped-up to fair market value upon the owner’s death:
In some circumstances, these assets may also be eligible to receive a step-up in basis:
Assets held in revocable or living trusts are eligible to be valued on a stepped-up basis when the trust grantor dies. Assets held in irrevocable trusts, however, are passed to heirs at their original basis. Consulting an attorney who specializes in estate planning is perhaps the best way to determine whether assets in a trust can be valued on a stepped-up basis.
Certain assets are not eligible for a step-up in basis. Many of these excluded assets are common financial tools designed to build wealth. They include:
One of the most significant considerations when passing on these types of accounts to your heirs is the tax ramifications.
One caveat to the step-up in basis provision is that assets cannot be transferred to heirs before the owner’s death – they must be transferred as part of the decedent’s estate in order to be eligible for this provision. Assets transferred before the owner's death will be valued at their original cost basis.
The most important advice when determining how your assets will be valued when you pass them on to your heirs is to consult an estate attorney to make sure your heirs can get the maximum amount when you die. It is also important to consider the tax implications, regardless of the type of asset. A bit of planning can help you preserve wealth and pass on more value of your estate to your heirs.