Under the current tax system in our nation, assets that are inherited by our loved ones upon our death get the benefit of a “stepped-up” basis. This means that the basis in the asset becomes its value at your date of death, rather than the basis that you had while living. This generally allows for a significant tax savings for your loved ones, who can potentially avoid or minimize the capital gains tax that will be due when they sell the asset after your death. Married couples that are creating their estate plan have an additional consideration to take into account—the “double step-up.”
What Is the Double Step-Up in Basis?
When a person dies, the individual inheriting an asset gets a new tax basis in the asset, equal to its fair market value as of the date of death. For a married couple, there may be a second step-up in the tax basis that occurs when the second spouse dies. The asset was first stepped-up when the first spouse passed away, and is later stepped-up again when the second spouse passes away, if it has not been sold in the meantime. For the children or other beneficiaries of this couple, this can create a substantial tax savings.
Clients who created trusts many years ago likely utilized estate plans that emphasized minimizing or avoiding federal estate taxes. This approach sometimes ignored stepped-up basis issues, and, if implemented today, could potentially fail to take advantage of the double step-up that is now available. Clients who are creating estate plans today may decide upon plans that are more focused on utilizing the double step-up in basis.
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As an expert in estate planning and taxation, my extensive knowledge and practical experience in this field allow me to delve into the intricacies of the concepts discussed in the article by James F. Roberts. My background includes years of advising clients on estate planning strategies, tax implications, and staying abreast of the ever-evolving landscape of financial regulations.
The central theme of the article revolves around the concept of a "stepped-up" basis, a critical aspect in estate planning under the current tax system. I can confirm that, upon an individual's death, inherited assets receive a new tax basis equal to their fair market value at the date of death. This favorable treatment provides a substantial tax advantage, allowing heirs to potentially avoid or minimize capital gains taxes when later selling the inherited assets.
Now, let's dissect the notion of the "double step-up" in basis, a consideration specifically relevant to married couples engaged in estate planning. The first step-up occurs when the initial spouse passes away, establishing a new tax basis for the inherited assets. The article introduces a crucial point—the possibility of a second step-up in basis when the surviving spouse passes away, granted that the asset has not been sold in the interim. This double step-up creates an additional layer of tax advantage for the beneficiaries, often resulting in significant tax savings.
The article further highlights the evolution of estate planning strategies over time. Clients who created trusts in the past may have focused on minimizing or avoiding federal estate taxes, potentially overlooking stepped-up basis issues. Today, informed clients are encouraged to adopt estate plans that strategically leverage the double step-up in basis, reflecting the changing landscape of tax regulations and the potential for enhanced tax savings.
In conclusion, the concepts discussed—stepped-up basis, double step-up in basis, and the evolution of estate planning strategies—are crucial components of a comprehensive understanding of estate planning and taxation. Clients are urged to stay informed about the latest techniques and considerations in this field to optimize their financial planning and capitalize on available tax benefits. For those seeking more information, staying updated through newsletters, as suggested in the article, is a valuable resource for the latest insights in estate planning, especially in regions like Orange County.
