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  • msf March 2014
Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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Understanding "Stepped Up Basis"

beebee
edited March 2014 in Off-Topic
The term "stepped up basis" was mentioned in a previous thread and it prompted me to want to learn a little more about this life (well...o.k., death) event. Tax implications are at the heart of this financial event. Many different scenarios play out with inherited assets and we can and should plan them out wisely depending on personal situations.

Anyone have a story or resource to share?

Defiition:
step up in basis

Article:
wills & stepped up basis

Comments

  • msf
    A few more details:
    - The basis of inherited property is changed, even if the property is worth less than when purchased (as step down in basis)
    - The holding period of the inherited property is automatically long term (I believe the 1040 instructions say to put "inherited" as the date of acquisition)

    - Sometimes you are allowed to use the value six months after death (or date of disposal of the asset) rather than date of death. But this is an all or nothing - either all assets are valued this way or none are. This is called the alternate valuation date.
    http://www.investopedia.com/exam-guide/cfp/postmortem-estate-planning/cfp2.asp

    Not only must the taxable estate drop in value, but so must the estate tax. This means that if you don't owe estate taxes (because the estate is below the federal exemption amount - $5.3M or so), you can't use the alternate date. Even if you owe state estate taxes (because the estate is in a state with a lower exemption, e.g. $1M).

    - The rules on joint property are not obvious.
    a) If the property joint between non-spouses (e.g. parent/child), the entire property is assumed to be part of the deceased's estate (possibly increasing the estate tax); this also means that the entire property gets a step up (or down)
    b) If the non-spouse joint owner can show he/she paid for some portion of the asset, then that portion is outside the estate, not included in estate taxes, and does not receive a step up/down.
    c) If the property is owned by spouses, in non-community property states, it is usually treated as 1/2 owned by the deceased. The other half gets no step up and is not included in the estate.
    d) If it is community property, the entire property gets a step up/down.

    As always, check the rules, your situation may vary, etc. For community property rules, start with Pub 555 and also check your own state's laws.
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