Maximizing The Step-Up in Cost Basis - YouTube

Just because you do not need to be paying estate  taxes anymore does not mean there is no need  

for tax planning and good wealth planning  in general coming up on enriching wealth  

we are going to be discussing the need for  tax planning and the very specific item  

related to an increase in the  step up in your cost basis.

Welcome back! We have a lot to get to today so I'm  going to be diving right into it we are going to  

be talking about the stepped up cost basis now  in general estate planning is something that is  

not as needed for many individuals because of the  fact that you have a higher deduction today than  

what you did just a couple years ago but that's  not the case with good tax planning in general  

so what I want to be talking about today  is how you can be better in your spouse,  

and your family through a well-defined wealth  plan that will encompass a stepped-up basis  

let's dive in and let's be talking about that  more and more now just because of the fact that  

we have a lot of estate planning needs doesn't  mean that we need to be pushing them to the side  

because of the fact that the estate tax has  basically gone away for many individuals now  

yes it is true that you may not be worried as much  about estate taxes today as what you may have been  

a couple years ago because well upon your death  there may be no tax owed but here's the thing  

even though death is no longer the deciding  factor here there's still a lot of planning  

that can be done now like i said before there's  uses for what's called a stepped-up basis  

so let's talk about this let's get the concept  down there before we start talking about this more  

now when it comes to income  taxes and death assets can be  

categorized in to basically two different  groups one can be something that's called IRD  

Income in Respect of the Decedent  now these assets are something that  

well they won't receive a step up in basis  common assets that are in this IRD type of a  

category are retirement accounts so think of it as  your IRA accounts your 401k accounts then we add  

in unpaid interest bonuses you may be receiving  final paychecks maybe even some installment sales  

that you have Net Unrealized Appreciation I  call them NUAS now all of these collectively  

do not have that that step-up basis and what I  mean by that is that that special tax treatment  

that comes with a step-up basis is not available  to these assets so there's income tax that would  

be due and owed on this on all of these assets so  instead of a beneficiary receiving these assets  

and having it not be taxable to them they  will actually have to pay income tax on  

those amounts that they receive in the  year that they receive them most likely  

so let's contrast all of that so basically  giving assets to a family member whether  

it's a son or daughter or whether it's even your  spouse that would be taxable in the event in the  

time that they owe it let's contrast that with an  asset that would receive a step up in basis now  

these are physical assets such as real estate or  tangible personal property but they can also be  

financial assets such as stocks and bonds mutual  funds ETFS and even digital currencies as well,  

now to the extent that any of these assets  have unrealized gains so gains that have not  

been taxed yet they're going to be included  in the estate of the decedent so think about  

it this way if you passed away they would be  included in your estate now death is actually  

in this case a very good thing for these  assets because income tax liability on those  

the ones that would have been owed to the  owner and if it was sold in his lifetime  

may go away what i mean by this more specifically  upon death the asset receives a step up in basis  

now the beneficiaries basis now of the  asset they receive becomes equal to  

the basically the value of when  they received it at the day of death

this provides something that really no other  type of planning can provide it can provide  

the appreciation that the decedent so  maybe you upon your death that appreciation  

that is now transferred to the beneficiary well  all that now is not taxable because of this step  

up when they inherited so you can do this with  no tax liability of being able to gift money  

upon your passing to say your spouse or your  children and they can receive that step up basis  

now the nice thing about this is that it  happens upon your passing but it will not happen  

if you pass it and gift it in your lifetime  so that's just one thing to be aware of here  

well that's a whole lot of information right there  let's run through a couple of examples here just  

to give you an idea of what I mean by this and  how you can be utilizing this to the best benefit  

well one example I have here let's say tom  purchased a stock 30 years ago and let's call  

this island corporation well he purchased it  for a thousand dollars and then he passed away  

let's call it the age 90 when the fair market  value the value of the stock was $125,000  

so he had a lot of appreciation on this  stock now the beneficiary was his son and  

he gifted it to his son who then turned in  and basically sold it for that $125,000.  

No income tax was basically a result of that  selling for the $125,000 because that $124,000  

of gain that tom had was transferred to his  son without having that taxation so that's  

an incredibly good point here that this is ways  that you can be gifting to others without tax so  

one critical point to note here is that in  order for the step-up basis rules to apply  

has to be upon your death it cannot be a gift  so just know that that we're talking about  

assets that are in your estate upon your passing  okay let's talk about another example here Renee  

is the beneficiary of an irrevocable trust so  there has been some estate planning done here  

and now she's the beneficiary of this trust and  that was established and funded by her mother  

many decades ago to minimize estate taxes now  upon Renee's death the remaining trust assets  

will be distributed outright to her daughter  so now we're talking third generation here  

the trust's largest asset is another stock which  is currently worth about $2.5 million,

and that stock was originally purchased  for about 50 000 so you can see as massive  

discrepancy between what is purchased  for and what the value of the stock is  

now like I said before Renee dies  and her daughter receives the stock  

because the stock was held within an irrevocable  trust we mean outside of Renee's estate  

so it was not part of her estate it does not  receive the stepped-up basis so part of the  

planning to do here is to figure out what we  need to be passing on to maybe say the kids  

and ones that we want to have that stepped  up basis and others that may be outside of  

your estate for other reasons but would not  be receiving that stepped-up basis so that is  

something of how you should be looking at this and  that's why good planning is very important okay  

now there's rules for jointly held property as  well and especially if you are in uh kind of a  

state that what's called separate property laws  I'm going to be talking about more about that  

as well here in a moment but let's focus on the  separate property laws here for a second that  

those those states that have separate property  laws now married individuals like to and tend to  

hold their assets jointly and if you're honest  about it it may or may not help just depending  

on how it is structured now if you have these  assets that are jointly structured this can be  

something that is a very good benefit to passing  on assets without much issue for your estate  

so you can pass things very easily and they would  not even have to go through probate in many cases  

there's differences here though of income  taxes that would be associated with this  

and when we talk about the stepped up basis when  we're talking about all of this together well  

you have a 50 ownership most likely in that stock  or that portion of that asset which means only 50  

percent of the asset would get a step up in  basis upon your death so yes that would help  

but it's only going to be half of the asset  well that's the the separate property states  

in a community property state that changes  just a little bit see a step-up basis rules  

are changed have changed for those states that  have the community property laws now what this  

means is that in specifically if we had joint  ownership you may actually now have the ability  

to claim a 100 step up in basis now that's the  difference there and there are certain states so  

namely Arizona, California, Idaho Louisiana, Nevada,  New Mexico, Texas, Washington, Wisconsin if you live  

in one of those states this applies to you and  this is a great piece for married couples so we  

can do some tax planning specifically for married  couples and we can actually reduce their tax bill  

just by passing assets upon death so again  there's a lot here whether you're in a separate  

property state or a community property state and  whether you're going to be passing upon death  

going to be gifting upon your life or going to be  putting it into a revocable trust that right there  

is need for a lot of wealth planning because  when you talk about all the different details  

making sure you have a well-defined wealth plan  that goes into detail about how the assets passed  

is going to be very vital okay now i talked  about the fact that the separate property states  

basically every other state that i did not mention  only receives a 50 increase if you had owned  

property jointly well the best way to go about  doing this to get that 100 step up is actually to  

be putting the assets in one spouse's name and  that alone can be very advantageous with capital  

gains so those 40 states that I did not basically  mention can really be beneficial beneficial here  

so what does that mean then is that if we have  the acids in one person's name especially the one  

that's going to die first they can be transferred  to the spouse receive a 100 step up basis from the  

spouse have a little growth that happens and  then another step up on that basis if it goes  

to the kids so that could be a double step up  in basis just because we did a little planning  

okay i hope you're following me so far we have a  couple other last little items to get to here as  

we respect to this step up basis the one the  last piece is what I call the Boomerang Rule  

and this is the also known as the one-year holding  rule and what this means is that you're going to  

be eligible especially in those states that are  the separate property so about those 40 states  

I didn't mention you have to hold the property  for one year as an individual so let's say you  

had gifted it from being jointly held into being  held by one spouse now the gift is not taxable  

especially within spouses on this manner  if it's with someone else that gift may be  

taxable so there are some implications that  you need to be aware of here but we need to  

be holding that for one year before it can pass  back to the other donor and receive that step up  

so basically if you do this on death bed transfer  assets to try to receive the step up the IRS is  

going to basically come in and say that is not  basically worthy of the step up and they're going  

to not allow that to happen so it has to be one  year to prevent people on their deathbed from just  

making all these transactions happen just to  get a step up basis and to try to avoid taxes  

that's the biggest thing here so just be aware  of the fact that there is that one year rule   

over the assets there and then the last thing that  I alluded to but just want to make this very clear  

is that this is some great planning but it is not  planning that can be done with money or assets  

that is outside your estate so basically an an  irrevocable trust or one that you're not direct  

owner of and it cannot be done with assets that  you gift to others in your lifetime so if you are  

wanting to gift that is not going to receive that  step up when you gift it to even your descendants  

so maybe say your children they will not receive  that step up in basis and actually they're going  

to receive the cost basis that you originally  had so that is also something to be considering

we've talked about a lot now like i said  before this is nothing to be worried about  

this is actually something to be excited about  in the estate and the tax planning that you can  

be doing to benefit your family and as you have  questions as you want to be diving into these  

details more and really make this a part of your  wealth plan feel free to reach out and I'll be  

happy to discuss this and your other tax issues  wealth planning issues and estate planning issues  

all at one time and what I call a Second Opinion  Review and this will look at anything that you  

have going on today where you want to go in  the future and then if there's gaps that exist

with that, take care and I look  forward to seeing you again.