The Double Step-Up: Why It’s Important When Creating an Estate Plan

Under the current tax system in our nation, assets that are inherited by our loved ones upon our death get the benefit of a “stepped-up” basis. This means that the basis in the asset becomes its value at your date of death, rather than the basis that you had while living. This generally allows for a significant tax savings for your loved ones, who can potentially avoid or minimize the capital gains tax that will be due when they sell the asset after your death. Married couples that are creating their estate plan have an additional consideration to take into account—the “double step-up.”

What Is the Double Step-Up in Basis?

When a person dies, the individual inheriting an asset gets a new tax basis in the asset, equal to its fair market value as of the date of death.  For a married couple, there may be a second step-up in the tax basis that occurs when the second spouse dies. The asset was first stepped-up when the first spouse passed away, and is later stepped-up again when the second spouse passes away, if it has not been sold in the meantime. For the children or other beneficiaries of this couple, this can create a substantial tax savings.

Clients who created trusts many years ago likely utilized estate plans that emphasized minimizing or avoiding federal estate taxes. This approach sometimes ignored stepped-up basis issues, and, if implemented today, could potentially fail to take advantage of the double step-up that is now available. Clients who are creating estate plans today may decide upon plans that are more focused on utilizing the double step-up in basis.

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