California Residents May Focus on Tax Basis While Planning Estates

Posted on Mar 22, 2014

In a recent report following the 2014 Heckerling Institute for Estate Planning conference, industry professionals are highlighting the changing landscape of estate planning for Americans. These changes come about following the January 1, 2013 legislative deal passed by Congress. Popular estate planning techniques that were used in the past may no longer be the techniques used going forward.

Tax Law Changes

Last year’s legal changes made several estate and tax laws permanent, including:

  1. Exclusions from federal estate and gift taxes
  2. Raising the top income tax rate on long-term capital gains
  3. Making the annual estate tax exclusion amounts portable between spouses

As a result of the new laws, an important focus during the estate planning process has shifted for some families from preserving each spouse’s federal estate tax exclusion amount to taking advantage of the step-up in basis of the deceased’s property. This new approach allows families to take advantage of income tax savings while allowing the surviving spouse to use and enjoy the assets. A step-up in basis occurs when someone inherits property. Typically, the basis in property, such as stock or real estate, is what the person paid for it. If this property is given to someone else while the person is still alive, the new owner takes on the giver’s tax basis in the property. When someone dies, however, the recipient who inherits the property gets to take advantage of a “step-up”, meaning the basis in the property becomes the amount that it is worth on the date that the property owner died.

Whether families should consider changing their approach to how they plan their estate depends largely on the state in which they reside. For example, in California, the state does not have an estate tax but does levy a 13.3% state income tax on income above $1 million. In some cases, it may create a greater tax savings overall for these families to focus on taking advantage of stepped-up basis in their assets while planning their estate. It is important to note, however, that not all assets will benefit from a basis step-up. This serves as an important reason why families should consult with a knowledgeable estate-planning attorney who can help assess what to do with each asset. 

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