California Estate Planning Blog by Kevin Staker

January 14, 2017

Estate Tax is Irrelevant for Substantially All Americans but the Step Up in Basis Is Very Valuable for Them by Kevin Staker

Filed under: estate tax,Kevin Staker — Kevin Staker @ 10:33 am
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Estate Tax is Irrelevant for Substantially All Americans but the Step Up in Basis Is Very Valuable for Them

The federal estate tax exemption is 5 million, indexed for inflation since 2010. “Portability” allows a surviving spouse to use the unused federal estate tax exemption of their deceased spouse.  The exemption in 2017 is $5,490,000.  Thus, a couple can transfer nearly $11 million to their children or other beneficiaries at their deaths without any federal estate tax.

The basis of appreciated assets is “stepped-up” (or down) to fair market value at death.  This eliminates any built-in capital gain on these assets. This happens even if the estate is not subject to estate tax.  For example, the estate is less than the federal exemption or passes to a surviving spouse.

Even the few taxpayers is estate tax territory should think twice before giving assets to their beneficiaries during their.   Even though such transfers would remove the appreciation in the transferred assets from their estate for estate tax purposes, the basis of these assets given away during life is not stepped-up at their deaths. Thus, the donees are stuck with their likely low income tax basis, and so income tax may be paid if the donee sells the asset.

Therefore, the benefit of the estate tax savings achieved by transferring an asset during a taxpayer’s life will likely be outweighed by  the cost of subsequent capital gains taxes when the donees later sell the asset.

By Kevin Staker

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