by Alison Robinson, CPA, Manager, Burdette Smith & Bish, LLC
“In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin
Sadly, they often go together. For the bereaved, this presents some uncertainty. And we can help.
It is often recommended that the elderly or sick give away their property before they die, for one reason or another. Sometimes for sentimental reasons, perhaps to avoid probate, or maybe they worry they won’t be mentally or physically up to managing their assets. Often this takes the form of deeding their house to their children. Accountants hate when that happens. We would prefer that the elderly be lovingly and capably taken care of by their heirs, and that all property and assets pass upon death. Here is our logic:
Let’s use Betty as an example. She has a home that she and her husband, Mort, bought in 1950 for $20,000. They made a few improvements through the years, adding another $15,000 to their “basis” making their total basis $35,000. (Basis is their investment in the property.) Mort died in 2000, and at that time the home’s Fair Market Value (FMV) was $100,000. Betty inherited Mort’s half ownership, becoming the sole owner. She got a “stepped up” basis for his half of the house, which was $50,000 (his half of the FMV on the date of his death). Betty’s original half didn’t get stepped up and remained at $17,500 (her half of the original $35,000). Her new basis was $67,500 (her original half, and her stepped up half from Mort). Sadly, Betty died in 2013. Her will spelled out that the home she and Mort shared will now go to their only living child, Bob. The FMV of the house in 2013 was $150,000. Bob decided to sell the old homestead, and did for $150,000. He paid no tax on the sale because his basis was “stepped up” to FMV when heinherited the house from his mother, and because he sold it for the same amount, there was no gain to be taxed. Everyone but the IRS is happy.
But what if in 2000, after Mort died, Betty deeded the house over to Bob, retaining a life-estate. In this case, Bob’s basis became $67,500, the same basis that his mother had. So, when he sold it after she died in 2013 for $150,000, his gain was $82,500, and boy did he owe taxes!
You can apply the same theory to stocks. If you are “gifted” shares of stock, your basis is what the benefactor paid for them. If you inherit shares of stock, your basis is the FMV of the stock on the date of death of the benefactor.
You can’t cheat death, and while you can cheat on your taxes, proper planning can help you handle both legally, morally, and with much less confusion.
“In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin
Sadly, they often go together. For the bereaved, this presents some uncertainty. And we can help.
It is often recommended that the elderly or sick give away their property before they die, for one reason or another. Sometimes for sentimental reasons, perhaps to avoid probate, or maybe they worry they won’t be mentally or physically up to managing their assets. Often this takes the form of deeding their house to their children. Accountants hate when that happens. We would prefer that the elderly be lovingly and capably taken care of by their heirs, and that all property and assets pass upon death. Here is our logic:
Let’s use Betty as an example. She has a home that she and her husband, Mort, bought in 1950 for $20,000. They made a few improvements through the years, adding another $15,000 to their “basis” making their total basis $35,000. (Basis is their investment in the property.) Mort died in 2000, and at that time the home’s Fair Market Value (FMV) was $100,000. Betty inherited Mort’s half ownership, becoming the sole owner. She got a “stepped up” basis for his half of the house, which was $50,000 (his half of the FMV on the date of his death). Betty’s original half didn’t get stepped up and remained at $17,500 (her half of the original $35,000). Her new basis was $67,500 (her original half, and her stepped up half from Mort). Sadly, Betty died in 2013. Her will spelled out that the home she and Mort shared will now go to their only living child, Bob. The FMV of the house in 2013 was $150,000. Bob decided to sell the old homestead, and did for $150,000. He paid no tax on the sale because his basis was “stepped up” to FMV when heinherited the house from his mother, and because he sold it for the same amount, there was no gain to be taxed. Everyone but the IRS is happy.
But what if in 2000, after Mort died, Betty deeded the house over to Bob, retaining a life-estate. In this case, Bob’s basis became $67,500, the same basis that his mother had. So, when he sold it after she died in 2013 for $150,000, his gain was $82,500, and boy did he owe taxes!
You can apply the same theory to stocks. If you are “gifted” shares of stock, your basis is what the benefactor paid for them. If you inherit shares of stock, your basis is the FMV of the stock on the date of death of the benefactor.
You can’t cheat death, and while you can cheat on your taxes, proper planning can help you handle both legally, morally, and with much less confusion.
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