Legal Briefs: What is "stepped-up basis"?

"Stepped-up basis" refers to a tax rule that minimizes or eliminates capital gains tax liability. Say, for example, your Uncle Buck owns Apple stock. He purchased 100 shares of the stock when it was worth $1/share. In tax lingo, his cost to buy the stock is known as his "basis." Apple stock is now worth about $170/share. If Uncle Buck sold his shares today, he would have to pay a capital gains tax on the $169/share appreciation in the value of his stock. Similarly, if Uncle Buck gifted you the stocks today, you would "inherit" his basis, meaning you would have to pay capital gains tax on the $169/share appreciation if you sold the stock tomorrow.

But let's say Uncle Buck decided to hold onto his shares. He placed them in a trust that names you as the sole beneficiary. If Uncle Buck died today, leaving you the stocks, the Internal Revenue Code provides that the value of the stock today (Uncle Buck's date of death) is your new basis in the stock. In other words, your basis is "stepped-up" from $1/share to $170/share. So if you turned around and sold the Apple stock for $170/share, you would pay no capital gains tax. 

The principle of "stepped-up basis" applies to other capital assets, most commonly real estate. Even though the law is more nuanced than the above example illustrates, the idea of "stepped-up basis" is an important one to consider when discussing potential estate planning options. To learn more about "stepped-up basis" or other estate planning terms, contact the Oklahoma City estate planning attorneys at Postic & Bates for a free, no-obligation consultation.

[As with all our posts, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]