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.