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Estate Planning 101: Step Up Basis

Estate Planning 101: Step Up Basis

February 16, 2022

Are you taking advantage of step-up basis?

We have seen many investors follow the plan of transitioning assets to children or heirs prior to their passing. They’re probably thinking this will save the kids from the hassle of transferring it, help avoid probate, keep it out of long-term care, etc.

One of the problems with that idea is your kids then are not be eligible for a step-up in basis. Which means they could be on the hook for the full tax upon the sale of that asset.

For example, let’s say you purchased some land a decade ago. When you made the purchase, it was worth $100,000. Now, let’s say it’s worth $300,000.  If you were to leave it to your children, they would inherit the land at the stepped-up cost basis of $300,000. If they were to turn around and sell that property for $300,000, they would not owe taxes. If they co-owned the property with you prior to your passing, they would inherit the land at the $100,000 cost basis and could owe taxes on the $200,000 difference after selling for the current market value.

As with everything to do with taxes, we highly recommend you speak with a professional before making any changes or decisions. 

If you have any questions about your estate plans, please give us a call.