Stepped-Up Basis and Capital Gains in Estate Planning for 2011 and 2012

By Peter L. Klenk, Esq.

Any asset that you might purchase and then later resell has a basis, or a value for which you purchased the asset. When you later sell the asset you either make a profit, loss or break even. If you make a profit…sell the asset for more than your basis…the profit is deemed a “capital gain” and is subject to capital gains tax. These profits are taxed at a different rate than ordinary income, interest or dividends.

Prior to 2010 when a person died all the capital gains built up in the person’s assets were erased, and the asset…be it real estate, stocks, or a coin or stamp collection…were given a new, “stepped up” basis equal in value to the date-of-death value of the asset. For example, if a woman in Bucks County, Pennsylvania had bought a share of stock worth $10.00 in 1995, and sold that stock in 2009 for $25.00, she would have paid capital gains tax on the $15.00 profit (the capital gain) on this investment. If instead she died in 2009 and left the asset to her daughter in Montgomery County, Pennsylvania, the daughter would have received the stock with a new, stepped up basis of $25.00. If the daughter sold the stock at $25.00 she would recognize no profit…capital gain…and paid no capital gains tax.

This step-up in basis rule recognizes that it is often difficult or impossible for surviving family members or other beneficiaries to calculate the deceased person’s basis.

For the year 2010, however, the rule was changed to a “modified carryover basis” for all property inherited from a decedent. Under these rules, executors could increase the basis of estate property only by a total of $1.3 million and, if assets passed to a surviving spouse, an additional increase of $4.3 million. All other assets took a carry over basis equal to the lesser of the decedent’s basis or the property’s fair market value on the decedent’s death.

For 2011, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (The “Act”) eliminated the 2010 modified carryover basis rules and put back into place the stepped-up basis rules that existed prior to 2010.

The stepped-up basis rules can be confusing, but can lead to large tax savings when part of an overall estate plan. Throughout our website, klenklaw.com, you may find more information about stepped-up basis as part of an estate plan, and as part of probating and estate. Our firm focuses exclusively in the area of estate planning and probate, and the litigation surrounding estate planning and probate, so if you need assistance with an estate plan or have questions about stepped-up basis, please call one of our probate lawyers or estate planning attorneys for a free consultation.