Inheriting an asset can be a mixed blessing. While it might signify a meaningful bequest from a loved one, it also comes with its own tax implications. One of the most significant tax features to understand when inheriting property is the "step-up in basis". As an estate planning attorney in Troy, Michigan, I often encounter clients who are unaware or confused about how this works. Let's break it down in simple terms.
What is 'Basis'?
Firstly, it's important to define what "basis" means. In tax lingo, the basis of a property is essentially its original value for tax purposes, typically the purchase price. When you sell an asset, the capital gains tax you owe is calculated on the difference between the selling price and this basis.
Step-Up in Basis: A Definition
A "step-up in basis" means that the basis of an inherited property is revalued or "stepped up" to its market value at the date of the decedent's death.
For example, imagine your grandmother bought a house for $50,000 decades ago. At the time of her passing, the house is worth $500,000. If you inherit this house and decide to sell it immediately for $500,000, the step-up in basis would mean that your basis for the house is $500,000, not the original $50,000. Therefore, you wouldn't owe any capital gains tax on the sale.
Benefits of Step-Up in Basis
- Minimized Tax Liability: The most apparent benefit is the potential reduction in capital gains tax when selling an inherited asset. This is especially beneficial for assets that have appreciated considerably over time, such as real estate or stocks.
- Simplicity in Record-Keeping: For older assets, it might be challenging to determine the original purchase price, especially if someone else was the purchaser. The step-up in basis provides clarity and eases the process of selling inherited property.
Considerations & Limitations
It's important to note that while the step-up in basis can provide tax advantages, it doesn't apply to all inherited assets or situations. For example, you do not get a step-up in basis on an inherited IRA. There might also be other factors, such as state-specific inheritance taxes or rules, which impact the overall tax picture.
If you are serving as Personal Representative of a probate estate or successor trustee of a trust, it is important to be careful with property in the estate or trust that will receive a step-up in basis. For example, there are often bills and debts that have to be paid after someone passes away. It may be a breach of fiduciary duties to sell stock in Apple that is in the estate or trust that has appreciated significantly since the now deceased owner bought it in order to pay these bills and debts, especially when there is other property that would be more appropriate to liquidate in order to pay the bills. It is important to check the terms of the Will or Trust to determine what it says about distributions-in-kind or, if the Will or Trust does not mention distributions-in-kind, what provisions of the Michigan Estates and Trusts code may then apply to the situation.
Contact a Troy Estate Planning Attorney
The intricacies of inheriting and selling assets, along with understanding tax implications like the step-up in basis, require expert guidance. Troy, Michigan estate planning attorney Andrew Byers is equipped to provide you with personalized advice tailored to your unique situation.
If the world of inherited assets, basis, and tax implications may seem daunting, but we're here to help. Reach out to us today at (248) 469-4261 for a consultation and be sure to mention this article for a comprehensive discussion.