Don’t Forget To Think About Income Taxes When Doing Estate Planning

Basis Step-Up at Death in the Estate Planning Context

When a person dies, his or her assets receive a basis equal to fair market value at date of death.  This basis adjustment is typically referred to as a basis “step-up”.  Each spouse’s one-half interest in community property receives a step‑up in basis on the first spouse’s death.  That means that immediately after death the asset can be sold without incurring capital gains tax, or that an asset can provide increased benefits of depreciation or amortization.

When a person gives something away during lifetime, as a general rule the donee receives the asset with a “carry over” basis – i.e., the basis of the donor.  Because the donor doesn’t own the asset at death, the basis step‑up will not be available.

Though this has been the law for decades, recent changes to income and estate tax rates effectively cause estate planners to look at estate tax planning benefits expected from proposed estate plans in a completely different light.

Past Practices

The maximum estate tax rate was 55%, and the applicable exclusion amount ranged from $625,000 in 1998 to $3,500,000 in 2009.  Combined Federal and California long‑term capital gains rates were 27% where no AMT applied.  In this context, moving assets for estate planning purposes to avoid an immediate 55% tax while giving up a basis step-up that would “cost” 27% was a good deal – there was a 28% savings to be had.