Search Site
Menu
The “Basis” for Good Planning: Using “Stepped-Up” Basis to Reduce Taxes

In recent years, it has become increasingly important to consider the income tax implications of gift giving and not just the estate tax implications.  For the majority of people, estate taxes are a non-issue due to the increase in the exclusion amount for US citizens.  However, income tax continues to impact everyone.  Therefore, an estate plan that is designed to optimize the income tax benefits to your heirs may have significantly more value than an estate plan focused solely on estate taxes.

The White House has identified the step-up in basis on capital assets as the “single largest capital gains tax loophole.”[1]  What is this loop hole you ask?  It is usually easiest to show with an example.  Imagine you have purchased stock in Google for $10,000 and over the years it has appreciated to $100,000.  If you sell that stock during your life the IRS will calculate the income taxes owed by subtracting your $10,000 basis from stock’s current fair market value of $100,000 which equals $90,000 [i.e. $100,000 – $10,000 = $90,000] of taxable income that can be taxed at a rate as high as 23.8% (or $21,420 in taxes owed).

Under this example, the capital gains taxes are more than twice as much as you originally paid for the Google stock.  Likewise, if you give that stock to your descendant while you are alive, then the recipient of that gift gets your original $10,000 basis and will have to perform the same capital gains calculation when they go to sell the asset.

By contrast, if a person dies owning that same stock there is a step-up in basis to the fair market value of the asset on the date of the owner’s death.  So if the stock is then worth $100,000 the new basis on the asset is $100,000 and the taxable income is $0.00 [i.e. $100,000 – $100,000 = $0].  With proper planning, this step-up in basis can occur again when the surviving spouse in a marriage passes providing your descendants with a second step-up in basis.

However, many older estate plans were designed to minimize estate taxes at the expense of maximizing the step-up in basis.  Accordingly, if you are holding on to older estate planning documents it is time to get in front of your estate planning attorney and make sure that your tax planning is still current in light of the changes in the tax law.

Royce Lanning

Phone: 281-367-1222

Fax: 281-210-1361

[email protected]

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact a Dedicated Texas Business Lawyer To Schedule a Consultation
Call 281-367-1222 or contact us online to schedule a meeting.

Strong In Action

  • Spring 2021

    The Strong Firm prevails in dispositive motion regarding Texas economic loss rule resulting in dismissal of claims again party.

    Read More
  • Spring 2019

    The Strong Firm successfully forecloses first priority lien against multi-million dollar commercial asset.

    Read More
  • Spring 2021

    The Strong Firm secures writ of reentry after unlawful lockout of commercial tenant.

    Read More
  • Spring 2021

    The Strong Firm prevails in writ of mandamus proceeding involving denial of temporary restraining order to stop foreclosure sale.

    Read More
  1. 1
  2. 2
  3. 3
  4. 4
  5. 5
  • Peer Rated 2021 Award
  • Clio Client-Centered Certification

Recent Blog Posts

Residential Real Estate: Lawyers, Title Companies, and Agents, Oh My!

Residential Real Estate: Lawyers, Title Companies, and Agents, Oh My!   The evolution of the internet and rapid increase in access to information has changed the way we buy and sell homes. While real estate agents still serve a vital role in the process on both sides of the transaction, many buyers
Read More
Residential Real Estate: Lawyers, Title Companies, and Agents, Oh My!

COMMUNITY AND SEPARATE PROPERTY IN TEXAS: OWNERSHIP AND CONTROL

COMMUNITY AND SEPARATE PROPERTY IN TEXAS: OWNERSHIP AND CONTROL Texas law characterizes property acquired by spouses either community or separate property when property is acquired, and this characterization has tremendous consequences. w defines a spouse’s "separate property" as: (1) property owned or claimed by the spouse before marriage; (2) property acquired during
Read More
COMMUNITY AND SEPARATE PROPERTY IN TEXAS: OWNERSHIP AND CONTROL

Scams in Times of Disaster and Emergency

Scams in Times of Disaster and Emergency While Texans are generally prepared for major weather-related disasters during hurricane season from June through October, occasionally a rogue weather event, such as an artic blast, sweeps across the state causing severe and unanticipated property damage to residential and commercial properties. As individuals and
Read More
Scams in Times of Disaster and Emergency

Legislation Authorizes Paid Sick Leave for Workers Suffering from Coronavirus

New legislation passed in response to the COVID-19 pandemic allows certain workers to receive paid sick leave even if their employer previously did not provide it. In March, the federal government enacted the Families First Coronavirus Response Act (FFCRA). This law assists employers that give their employees paid time off
Read More
Legislation Authorizes Paid Sick Leave for Workers Suffering from Coronavirus
  • Video Vault


    Watch videos done by our legal team to gain a better understanding of your legal needs. Our lawyers give video insight into areas such as Real Estate, Business Law, Mergers & Acquisitions and much more.
Contact us

Quick Contact Form