Posted by: Woodfork Law | May 2, 2013

Important! Step up basis

The concept of “step up basis” is one of the most beneficial items when it comes to taxes in estate planning.  Although step up basis can be a complex issue, fundamentally, it’s fairly simple.  First, “basis” itself is essentially what you paid for an item.  For example, you buy a house for 200k that is your “basis” or “cost basis.”

Now, “step up basis” simply means the value of the item when you pass away, and your heirs inherit the item in your will or trust.  For example, you buy a house for 200k in 2013, then pass away in 2073 and the house is worth 900k. Your kids will inherit the house valued at 900k.  Now here’s the benefit, if your kids sell the house 1 year later for 902k, they would only pay tax on the 2k gain, not the $702,000 gain. The original cost of 200k was “stepped up” to 900k.

To see the real benefit in step up basis, look at what happens if no step up.  If you give an item to your kids as gift while you’re living, instead of leaving it in your will or trust, your kids get the item as valued at the time you bought it.  So in the above example, if not inherited, but gifted, your kids receive the gift of a house with a basis of 200k (even though market value is 900k).  Now, again, if the kids sell it a year later for 902k, they would pay tax on the entire $702,000 gain.  Big difference.

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