The Death Tax and Basis

Much has been made about the repeal of the Estate tax, commonly called the death tax. Currently, an individual can pass $5.49 million to their heirs at death. That amount is doubled for married couples, to approximately $11 million. Anything over that amount is subject to estate taxation at a forty percent rate. President Trump outlined a framework for tax change yesterday that included the repeal of the estate tax.

The estate tax was temporarily repealed in 2010 The temporary repeal brought with it something called “modified carryover basis”. That’s a scary term. For the sake of this article, lets agree  that there are two methods of calculating your basis in an inherited assets: carryover basis and “step up” basis”. 

“Carryover” basis means that the basis of the assets carries over from the decedent. If your grandmother left you 100 shares of stock that she paid $1 for fifty years ago, then that basis carries over to you. If you sell it for $10, your cost is $1 and you pay taxes on the $9 gain. Carryover basis is a method for taxing the unrealized gains if a transferred asset.

“Step up” basis is generally more friendly to the inheritor than carryover. Furthering the above example, if the stock that your grandmother is worth $10 on her date of death, then that $10 is considered your basis. So, if the stock was still worth the $10 when you take ownership, and you sell it for that, then you pay no capital gain taxes. Your basis is “stepped up” to the date of death.

With the 2010 repeal, the government introduced the “modified carryover basis” which allowed you to have a step up in basis of no more than $1.3 million in aggregate. This may seem generous, but if you inherit an estate worth $100 million with little to no basis, its doesn’t help that much.

The purpose of this article is not to entertain anyone. I’m not sure that a discussion of basis is capable of doing so. However, if the current administration is successful in repealing the death tax, keep an eye on what type of basis is offered on inherited assets.

DISCLOSURE: THIS ARTICE IS WRITTEN FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE RELIED UPON AS TAX OR ESTATE PLANNING ADVICE. I AM NOT AN ATTORNEY. PLEASE CONSULT WITH A QUALIFIED ESTATE ATTORNEY FOR QUESTIONS ON YOUR OWN PERSONAL SITUATION.