Distributing Appreciated Assets

How to Minimize Income Tax Liability for Your Heirs

Skillful planning for the transfer of appreciated assets (such as stocks or real estate) can allow for significant income tax savings for the beneficiaries of these assets.  In most cases, keeping your appreciated assets until your death is the best method of leaving assets to your heirs, with the least possible income tax liability.  Inherited assets receive what is called a “step-up” in basis.  This means that your heir pays no income tax on the asset’s capital gain that was earned during your lifetime.  When an asset receives a step-up in basis, the new basis for evaluating the income tax liability of that asset when sold by your heir is the value of that asset on your date of death, not its value when you originally purchased it.

Say, for example, you bought shares of a stock for $1,000, and these shares appreciated in value over the years to $10,000 by the time of your death.  If your son inherits the stock, the shares automatically receive a step-up in basis to $10,000.  When he sells the stock, he will pay tax only on the capital gain he receives above $10,000.  Had you gifted the stock to him during your lifetime, he would take your original basis and upon sale, he would have to pay tax on the entire capital gain above the $1,000.  As you can see, receiving a step-up in basis can make a considerable difference in income tax liability.

Thoughtful planning in titling assets and naming beneficiaries can save your heirs significantly.  It is always best to consult an attorney well-versed in tax matters when doing estate planning and preparing for transfer of any large assets.  At Niehaus Law Office, LLC, we have focused on estate planning and administration since 1978 and have been preparing individual tax returns since 1976.  We know the “ins and outs” of estate planning and can help you make optimal decisions regarding the assets you have acquired over your lifetime.