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The Estate Tax Step-Up in Basis – Does it Matter to You

shutterstock_96626983-300x300Estate and gift taxes have effects that may vary widely depending on the value of an estate and the place where you live.  When a person engages in estate planning, the tax consequences are always considered.  Like most taxes, estate and gift taxes are imposed by various states and by the Federal government.  Estate lawyers in New York can assist their clients with these matters.

During recent years, most individuals have not had to worry about paying estate or gift taxes.  At present the exemption for Federal estate tax is $11.7 million per individual.  Even in a highly taxed state like New York, the individual exemption is presently $5,930,000.00.  There are various strategies to diminish the impact of these taxes.  Provisions in Last Wills can utilize trusts and other methods to defray taxes.

What is important to realize is that the step-up in basis is really an income tax concept.  Basis, from an accounting standpoint, is the cost of an item.  This cost or basis is used to determine the taxable gain, typically a capital gain, which is incurred when an asset is sold.  As an example, if you purchased a house for $1,000.00 (the basis) (ignoring any additional costs or depreciation), and then sold the house for $2,000.00, the gain would be $1,000.00.  This gain would be the amount subject to tax.

One of the more beneficial aspects of the estate tax system is that upon a person’s death, the basis or original cost of an asset owned by a decedent is increased or stepped-up to the fair market value of the asset as of the decedent’s date of death.  So in the above example, if the person owning the house died when its market value was $2,000.00, the individuals inheriting the house could sell it for $2,000.00 and not pay any tax on the sale.  The basis would have increased or be stepped-up to $2,000.00, eliminating the $1,000.00 gain.

In most estates, having a step-up in basis is an enormous benefit, particularly where a decedent’s assets such as real estate or financial accounts may have seen enormous growth during decades of ownership by a decedent.  As a note, the step-up in basis was briefly eliminated in 1976 but the law was repealed before it took effect.  Since most estates nowadays are not subject to estate taxes due to higher estate tax exemptions, the availability of the step-up in basis provides protection on the income tax side of the equation which allows families to retain the untaxed value of a decedent’s estate.

As can be imagined, even if the new tax proposals carry with them an exclusion of say $1,000,000.00, the effect on many modest estates where assets such as a home have been owned for decades or retirement accounts have grown throughout a lifetime of work can be significant.  There is even talk that the tax would be due even if the asset is not sold by the beneficiary thus forcing sales to cover the tax bill.  These effects can have dramatic financial consequences for family properties, business assets and retirement investments.

As a New York trust and estate attorney for 40 years, I am familiar with estate taxes and a plethora of issues affecting probate and estate administration in the Surrogate’s Court.  Estate tax and other laws are changing all the time and consulting with experienced lawyers can be very helpful, particularly where your rights to an inheritance may be at risk.

Call Me Now for a free confidential review of your estate or guardianship matter.  We provide reasonable and flexible fee arrangements and personal representation.

New York Trusts and Estates Attorney Jules Martin Haas has helped many clients over the past 40 years resolve issues relating to guardianship and probate and estate settlement throughout New York City including the Bronx, Queens, Brooklyn, Manhattan, Nassau and Suffolk County.  If you or someone you know has any questions regarding these matters, please contact me at (212) 355-2575 for an initial free consultation.

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