Understanding Step Up In Basis: Another Way the Estate Tax Repeal May Effect Your Family

If you are writing your will, or if you have just inherited money, stocks or property, it is important to understand the parts of the tax code that apply to these assets. For those whose inheritance comes in a form other than cash, knowing what step up in basis assets are is crucial to calculating inheritance taxes upon receipt, as well as capital gains taxes in the years to come.

In terms of inheritance, step-up in basis refers to the value of assets upon the death of the original owner. For example, if stocks in a portfolio are transferred, their value is set not at the price at which they were originally purchased, but at their value at the time of the original owner’s death. This means that the heir will be responsible for paying the inheritance tax on their full value, but not additional capital gains taxes based on their appreciation during the lifetime of the deceased. In this way, one can avoid being taxed twice for the same asset. Even if an heir cashes any outstanding stock there will be no additional financial penalty.

Given the lack of estate tax 2010 legislation, the manner in which these assets will be taxed has changed this year. As of now, heirs who inherit assets that have appreciated since their purchase will be taxed in the much same way that the original owner would have been. For the year 2010, these assets will be treated on a carry over basis. This means that heirs will be responsible for paying the capital gains taxes on assets that have appreciated in value since their original purchase or acquisition. For those who inherit property or stocks, this may actually mean that heirs will be taxed at a higher rate than they would be under the old estate tax law.