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Estate Tax
Probate & Non-Probate Assets
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Durable Power of Attorney
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Income Tax: Step-Up In Basis
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Titling Your Assets
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Living Will &
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Organizer of Information, Document Locations, and Funeral Arrangements
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Some clients hold numerous shares of one stock as Joint Tenants with Rights of Survivorship. Consider holding half in the husband’s name, Transfer on Death to the wife, and half in the wife’s name, Transfer on Death to the husband. If either dies, a full step-up in basis will be recognized on the shares received by the survivor, who can then sell those shares without realizing a capital gain.
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Step-up in basis is an important income tax concept applicable to the estate planning process. Suppose a son inherited a stock from his father, who had paid $1,000 for the stock. At the time of his death, it was worth $10,000. The son would get a step-up in basis to $10,000 so if he sold the stock for $10,200, he would only have a $200 gain on the sale.
If the son held the stock and it grew to $100,000, and he gave his stock to his child, he would give his child his income tax basis of $10,000. If his child subsequently sold that stock for $100,000, there would be a $90,000 capital gain and approximately $18,000 would be due in taxes (20% – 15% federal and 5% Ohio). It would be much better for the owner to die with the appreciated stock so the child could get a full step-up in basis to the date of death value.
Property held as joint tenants do not get a full step-up in basis. For example, if there are two joint tenants, the surviving tenant only receives a 50% step-up in the property's fair market value.
Note that IRAs, 401(k)s, annuities, E and EE bonds and other tax deferred assets are not eligible for the step-up in basis. So stocks or other investments do not get a step-up when held within a tax deferred investment vehicle.
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