What does “Basis” Mean in Regards to Capital Gains and Estate Planning

Up until recently the mark of a good probate attorney was how they  minimized estate tax liabilities but more and more people are getting concerned (rightfully so) about reducing capital gains tax liability which may have previously been the turf of the tax lawyer. When you sell an asset such as a security (i.e. stocks) you owe capital gains tax on the difference between you paid and what you got, assuming it increased in value, if it lost value then you can mark a loss of income to reduce your income tax liability. In order to determine what number you subtract from the sale price, you need to know the basis which can be tricky and different depending on how you got your stock. 

• If Bob buys a piece of stock for ten dollars and sells it for twenty, the IRS will expect him to pay taxes on ten dollars of income because the sale price minus his basis is ten dollars. (20-10=10). But what if Albert, Bob’s father, gives him that stock?
• Then the calculation is a bit different. If you inherit assets including marketable securities you “step up” the tax basis to whatever they were worth at the time of benefactor’s death. In other words all the capital gains you inherited would not be taxed.
• Put another way if Albert bought the stock for 10 dollars, and died, leaving it to his son, and it was now worth $20 and then Bob immediately sold it, he would have no income off of that sale. 
• Or Bob can save the stock, sell it later for $30 and then he will only owe 10 dollars of income rather then 20.
• Step up basis is not new but it became much more important in 2013 after Congress passed a tax reform that made a permanent generous exclusion from estate and gift tax. Presently an individual may transfer 5.43 million dollars during their life or at death before the 40% estate tax kicks in. 

Why does this matter for your Florida Estate Plan?

So, lets assume your rich uncle has some blue chip stocks that he has held (and lived off the dividends for) for years and now he is considering giving them to his children or other relatives, well if he waits until his death he could save them signifigantly on their capital gains tax obligations because of the stepped up basis.