If you are fortunate enough to have a moderate to large estate that you plan to pass down to future generations you undoubtedly wish your estate assets to retain their full value – or as much of it as possible – after they are passed down. Although your beneficiaries may not pay estate taxes on their inheritance at the time they receive the assets, they could owe capital gains taxes should they sell any of those assets down the road. If you plan to pass assets down by using a trust, you may then wonder “ Do my assets get a step up in basis if they are in my trust when I die?”
The term “step up in basis” refers to the way in which capital gains taxes are calculated upon the sale of a capital asset. Whenever a capital asset – and just about all assets are considered capital assets as far as the IRS is concerned – is sold and a gain is realized that gain is potentially subject to capital gains taxes. As a general rule, gain is calculated by taking the sale price of the asset and subtracting the “basis” of the asset. The basis is typically the purchase price. For example, if you purchased real property for $100,000 20 years ago and you sell it tomorrow for $400,000 you have made a gain of $300,000. That $300,000 is then potentially subject to capital gains taxes. If, instead of selling that property, you gift it to a loved one, and the beneficiary then sells the property, he or she could be subject to paying capital gains taxes. Because that seems an intrinsically unfair result, a “step-up in basis” may be used when inheriting an asset on death.
A step-up in basis means that instead of using your basis in the property, the beneficiary uses the fair market value at the time of death as the basis for the property for the purpose of calculating capital gains taxes. For the property mentioned above, therefore, your beneficiary would use $400,000 as the new stepped-up basis in the property whenever he or she sells the property.
Whether the asset is gifted outright or gifted through a trust does not matter. All assets gifted at the time of death may use a step-up in basis.
If you have additional questions or concerns about capital gains taxes, trust agreements, or estate planning in general, contact the experienced New York estate planning attorneys at The Law Offices of Kobrick & Moccia. by calling 800-295-1917 to schedule your appointment.