Understanding Step-Up in Basis: A Powerful Estate Planning Tool

For many families, a significant portion of their wealth is tied up in appreciated assets—stocks, real estate, or business interests that have grown substantially in value over time. When planning your estate, understanding the "step-up in basis" rule can be one of the most valuable tax advantages available to your heirs.

What is Step-Up in Basis?

Simply put, when you inherit certain assets, their tax basis is "stepped up" to the fair market value as of the date of death, rather than the original purchase price paid by the deceased. This can dramatically reduce or eliminate capital gains taxes when those assets are eventually sold.

For example, imagine your parent purchased a home for $100,000 in the 1980s that's now worth $600,000. If they sold the home during their lifetime, they would potentially owe capital gains tax on the $500,000 appreciation. However, if you inherit the home after their passing, your new basis becomes $600,000—effectively wiping out any tax liability on that $500,000 of growth.

Assets That Qualify for Step-Up

The step-up in basis applies to most inherited capital assets, including:

Real estate
Stocks and bonds (held outside retirement accounts)
Business interests
Collectibles and valuable personal property

Note that certain assets, like retirement accounts (401(k)s, traditional IRAs) and annuities, don't receive a step-up in basis because they're subject to different tax rules.

Strategic Planning Opportunities

Understanding step-up in basis opens several planning considerations:

1. Timing of Asset Sales

For elderly or ill individuals with highly appreciated assets, it may be more tax-efficient for heirs to inherit the assets rather than selling during life (depending on the circumstances).

2. Community Property Considerations

For married couples in community property states like Washington, both halves of community property receive a full step-up in basis when one spouse dies—not just the deceased spouse's portion.

3. Balancing Step-Up Benefits Against Estate Tax Concerns

While the step-up rule can provide income tax savings, families with estates approaching the federal or state estate tax thresholds need to balance these benefits against potential estate tax liabilities.

Recent Legislative Developments

It's worth noting that the step-up in basis has been the subject of legislative debate in recent years, with various proposals to modify or limit this benefit for high-net-worth estates. Working with an experienced estate planning attorney is essential to navigate these potential changes.

How We Can Help

At Heritage Corporate & Legacy Advisors, we help Vancouver families maximize the benefits of step-up in basis while ensuring your overall estate plan aligns with your goals. We consider not just the tax implications but also your family dynamics, charitable intentions, and long-term legacy planning.

Contact our office today to discuss how step-up in basis fits into your comprehensive estate plan.

This article is intended for informational purposes only and should not be construed as legal or tax advice. Each individual's situation is unique, and readers are encouraged to consult with qualified legal and tax professionals regarding their specific circumstances.