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What are the benefits of inheriting stock or other assets?

If you’re planning your estate, or you’ve recently inherited assets, calculating the cost (or “basis”) for taxes, may be a little tricky.

What are the basic rules?

The “step-up and step-down” rules are used to determine the current fair market value of the inherited property based on the date of death. For example, if your parent bought stock in the 1980s for $1,000 and it was worth $75,000 on the day of their passing, your basis in the inherited stock would be stepped up to $75,000. The increase in stock basis of $74,000 ($75,000 – $1,000) is completely tax-free.

The current fair market value rules also apply to property inherited from foreign individuals, even if they aren’t subject to U.S. estate tax. If the property or assets are owned jointly by the inheritor and the deceased, the rules apply to the inherited portion of the property, but not the portion of jointly held property the inheritor owned before their inheritance. The fair market value rules do not apply to reinvestments of estate assets by fiduciaries.

What if you are gifted assets before death?

Referring to our example above, if your parent gifts you stock during their lifetime (rather than as an inheritance after their passing), you would not receive the “stepped-up basis.” Gifted property that has gone up in value is subject to “carryover” basis rules. This means the person receiving the gift will have the same basis the donor had (i.e., $1,000 in our example), plus a portion of any gift tax the donor pays on the gift.

When someone dies owning property that has declined in value, a “step-down” may also occur.  In this case, the inherited property’s basis is lowered to the date-of-death value. If the property is gifted before death, the person receiving the gift must take the date of gift value as their basis (used for determining the gain/loss on a later sale).  A good strategy for a property that has declined in value is for the owner to sell it before death and utilize the tax benefits of the loss (e.g., use this loss to offset other current-year realized gains).

Estate planning and taxes

These are the basic rules – other rules and limits may apply. In some cases, after a person’s death, the executor may be able to make an alternative valuation election. Please contact your tax advisor for assistance when planning for estate and inheritances taxes as well as lifetime gifting of property.

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