Don’t Forget About Tax Basis When Creating Your Estate Plan

As you start the journey of planning your estate, you likely have many important considerations on your mind. If you have young children, this may include appointing a guardian to care for them. Other considerations may include deciding who should be in charge of handling the administration of your estate, thinking about your end of life care, and choosing who should receive your assets. Another, lesser-known consideration that should also be addressed relates to the tax basis of your assets and the potential impact that it may have on your loved ones. Fortunately, an experienced estate planning attorney can help you create a plan that accomplishes your goals while also planning for potential tax consequences.

What Is Basis?

he cost basis of an asset is typically what you paid for it when you acquired it. For example, if you purchased a home in Orange County in 2005 that was worth $500,000, your basis today is still $500,000. In some cases, the basis of an asset can be reduced if the asset is depreciated over time for tax purposes. This is known as an “adjusted tax basis.”

The Impact of an Asset’s Basis When it Is Sold

The basis of the asset is how we determine whether a taxable gain occurred, or whether there was a loss, when the property is sold. For example, the Orange County home that you sold could generate a taxable gain if the sale price in 2014 was $1,000,000.

How Stepped-Up Basis Impacts an Estate Plan

When an individual dies, certain assets get a so-called “step-up” in basis. The new basis of the asset becomes the fair market value on the date that the person died. Therefore, if the house is worth $1,000,000 when you die, the person who inherits it now has a basis of $1,000,000, rather than the basis of $500,000 that existed when you were alive. This means that the heirs to your estate receive a significant tax savings. They are not liable for the appreciation that occurred on the asset from the date that you bought it until the date that you died. They may even avoid having to pay capital gains tax entirely.

To learn more about important considerations while planning your estate, we encourage you to view our free, easy to understand pamphlet, The Ten Things You Must Know Before Creating (or Amending) Your Will or Trust.