Consider how basis factors into estate planning

With the passage of the 2012 American Taxpayer Relief Act, most Americans no longer have to center their estate plan around avoiding the estate tax, which can be as high as 47 percent of taxable assets. Currently, only those individuals in Pennsylvania who have an estate worth more than $5.43 million have to be concerned about the estate tax. For the rest of us, estate planning often focuses on how assets can be passed in such a way as to avoid income taxation.

For example, when an heir inherits a piece of property, he or she also inherits a basis in that asset. The basis is equal to the market value of the asset at the time of the individual’s death. Any losses or gains that took place between the time that the asset was acquired and the time of death are ignored for the purposes of taxation.

Income tax on inherited property is limited to the difference between the heir’s basis and the sale price. In this way, the heir could immediately sell the asset at market value and would incur no income tax. This makes such a transfer of property very appealing in cases in which the heir is expected to sell a property right away.

That said, an asset that has significantly depreciated in value since the time of purchase might be better suited for gifting prior to death. In such a case, the recipient would receive the same basis that the owner holds at the time of transfer, which is equal to the amount paid for the property. He or she would not be liable for income taxes until such time as the property increased in value to or beyond the basis. This gives the recipient a measure of breathing room to use or hold the property before it is ultimately sold.

As with all estate planning matters, each set of circumstances is unique, and the best solution lies in a carefully crafted plan that takes a holistic approach. For those in Pennsylvania who are concerned with minimizing the tax ramifications for their heirs, it may be worthwhile to sit down with an estate planning attorney, who can go over all of the available options. Estate planning needs change over time as new legislation is passed and should never be thought of as a static process.

Source: wraltechwire.com, “Modern estate planning – It’s all about that basis“, Virginia Carter and Zachary Lamb, May 27, 2015