Advanced Underwriting Consultants

Question of the Day – May 2

Ask the Experts!

Here’s the question of the day.

Question:  My client made a gift of highly appreciated real estate to family members last year.  The client passed away this year.  Do the new owners receive a step-up in basis due to the original owner’s death?

Answer:   No.

Capital assets included in a decedent’s taxable estate at death get a step-up in basis to full fair market value.  Thus, someone inheriting capital property will be able to sell that property shortly after the decedent’s death with little or no capital gains tax.

Certain kinds of transfers prior to death may still cause the asset to be included in the decedent’s estate if the transfer was made within three years of a decedent’s death.  These kinds of transfers include gifts with a retained interest or gifts of life insurance.

An outright gift of property, even if done one day prior to the decedent’s death, gets carryover basis treatment, and there’s no step-up in basis for the recipient.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Question of the Day – April 29

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  What is the advantage of acquiring capital property by inheritance rather than by gift?

Answer:  It has to do with the basis of the property in the hands of the recipient.

In general, capital assets owned by a decedent get a step-up in basis at death.  Examples of capital assets include stocks, bonds, mutual funds and real estate.  Say for example that Rob owns stock in Brady Industries for which he paid $1,000 and is now worth $10,000.  If Rob passes that stock to Richie at his death, Richie’s basis in the stock becomes $10,000—its value as of the date of Rob’s death.

If, on the other hand, Rob makes a gift of the stock to Richie during Rob’s lifetime, Richie receives carry-over basis from Rob.  That means Richie’s basis in the stock will be $1,000—the same as Rob.

If Richie sells the stock prior to his death, it will be better from an income tax perspective to have received it by inheritance than by gift.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.