Death is certain, but it comes with a financial upside: the step-up in cost basis.
Death isn’t a topic we enjoy discussing, but it’s essential to understand its financial implications. One overlooked aspect is the “step-up in cost basis,” a tax benefit that can be a game-changer for your estate and heirs.
What is Cost Basis?
In simple terms, the cost basis is the original value of an asset for tax purposes. When you sell the asset, the cost basis helps determine your capital gains tax.
Understanding the Step-Up
When you pass away, your assets usually get a new cost basis, equal to their market value at the time of your death. This is what we call a “step-up in cost basis.”
Why It Matters
Let’s say you bought a stock for $10, and now it’s worth $100. If you sell, you’d pay capital gains tax on the $90 gain. But if you hold onto it until you pass away, your heirs’ new cost basis would be $100. They could sell it immediately without owing any capital gains tax.
It’s important to note that not all assets qualify for this step-up. Retirement accounts like 401(k)s and IRAs are generally not eligible.
If you’re in the process of estate planning, think about which assets could benefit most from a step-up in cost basis. This strategy can minimize the tax burden on your heirs and maximize the value of your estate.
While death is an uncomfortable subject, understanding the step-up in cost basis can offer a financial advantage. Your plan should aim to maximize your step up by holding assets in the proper way.
Understanding how to maximize your heirs step up is an essential tool for effective estate planning that can save your heirs from unnecessary taxes.