One of the greatest tools in the estate planning toolbox is stepped up basis. Basically, stepped up basis refers to an assets basis that is “stepped up” to the assets current fair market value (FMV) at the time that the decedent passed.
For example, a decedent who died today and had a purchase of Google stock at $106 back in 2004 would be given a step up in basis to today’s FMV of Google at $1,158. If the beneficiary of the stock were to sell the Google stock tomorrow, the entire gain from $106 to $1,158 would be tax free.
Another area where we see huge gains for stepped up basis in California is in the real estate market. Many baby boomers bought homes in California back when home prices were about forty thousand dollars for a nice home by the beach. Today, the FMV of the same home is over one million dollars. The entire nine hundred and sixty thousand dollar gain would pass to the beneficiary income tax free.
Now let’s say the beneficiary holds onto the property for another ten years (or at least two years) and the property increases in value to over one and a half million dollars. The beneficiary then would own a property with a FMV of $1,500,000. If the beneficiary is single, he/she could sell the property and the tax basis would only be $250,000. If the beneficiary is married and he/she co-mingles the property with his/her spouse, the tax basis would be zero.
The reason that it is important to understand stepped up basis in California is because the beneficiary of the real estate or stock would be best served inheriting the property rather than receiving the property as a gift while the original owner of the property is still living. If the beneficiary received the property as a gift, the tax basis of the above property would be $40,000. If the beneficiary of the property sells the property for the current FMV of $1,000,000, the beneficiary would have a taxable gain of $960,000!!!
For questions on this article or for any other estate planning or business law questions, please contact an experienced estate planning and business law attorney in California today!
The authors, publisher and host are not providing legal, accounting, or specific advice to your situation.