Michigan Estate Planning Blog

What Is a ‘Step-Up’ in Basis in Estate Planning?

Let’s say that you have a condominium in New York that’s currently being rented out, and you retired to Florida. You plan to sell the apartment within the next year or two, which is in your name, not your trust.

However, the question arises if you didn’t sell it and put it in trust, would the condo get the stepped-up basis if it were sold after we pass away, asks Market Watch’s recent article entitled, “Will our condo get a step-up in basis if we put it in trust?”

The answer is yes for revocable trusts and most irrevocable trusts.

Trusts can be beneficial for out-of-state property to avoid two probate processes upon the death of the owners, one in their state of residence and one where the out-of-state property is located. These are usually revocable trusts. Irrevocable trusts may be used for other purposes, such as asset protection.

The “step-up” in basis concerns the calculation of the capital gains on the sale of property. The capital gain is the difference between net proceeds on sale and the basis. The initial basis is the purchase price of the property. The cost of any improvements may be added to it.

So, for instance, if you paid $500,000 for your condominium and spent $100,000 replacing the kitchen, the basis would be $600,000. If you sold the apartment for $1 million, your capital gain would be $400,000.

The step-up in basis is another adjustment that occurs when an owner dies. At that time, the basis is adjusted to the date-of-death fair market value of the property. This is commonly called a “step-up” in basis because real-estate values typically increase over time, so the new basis is typically higher than the old one.

In the example, if the condo had a market value of $1 million upon the death of the owner, that would become the new basis. If the property were sold, any capital gain would be only an increase in value after death.

To receive a step-up in basis on a property upon the death of the owner, it must be in their taxable estate. All property in a revocable trust created by the decedent is in their taxable estate.

Whether an irrevocable trust is in the decedent’s taxable estate depends on how it’s drafted. Ask an experienced estate planning attorney to draft an irrevocable trust for estate inclusion and consequently a step-up in basis if that’s your goal.

Reference: Market Watch (April 7, 2023) “Will our condo get a step-up in basis if we put it in trust?”

 

What are Biggest Blunders in Wealth Transfer?

 

When it comes time to transfer what we’ve work so hard to accumulate, the way in which we transfer our wealth can have a big impact on how much of our wealth is actually received by our heirs and how much is transferred to the federal government.
Forbes’ recent article entitled “Top 7 Tax Mistakes Made in Planning a Wealth Transfer” says that tax mistakes can mean losing a lot of hard earned money, if you’re not careful. Here are some of the biggest mistakes made in wealth transfer planning.
1. IRD Taxes. Most people are unaware of this tax. It stands for “Income in Respect of the Decedent.” It’s the income tax your heirs will pay on tax-deferred assets, such as traditional IRAs, 401k’s and annuities. In many cases, these taxes will push heirs into a higher marginal tax bracket. You should plan to reduce or eliminate the IRD Tax, if you have a 401k, IRA or annuities. For example, if you gift IRA and 401k assets to charity and non-IRD assets to your heirs, you can save them in IRD Taxes! The use of a Charitable Remainder Trust can provide a tax-efficient way to create a “charitable stretch IRA” for your children or grandchildren.
2. Charitable Giving Mistakes. Most people do charitable giving with after tax cash from their income. However, this isn’t the most efficient way to give. Gifting highly appreciated securities, real estate, or even business interests can give you a double tax benefit: it can eliminate capital gains taxes and still get the charitable tax deduction.
3. Dying without a Comprehensive Estate Plan. About three-quarters of Americans die without a will. A will, by itself, subjects your assets (and your heirs) to probate. A well-designed estate plan can help reduce or eliminate both probate and estate taxes. Ask an experienced estate planning attorney about creating a comprehensive estate plan for you or review the one you have.
4. No (or Improper) Beneficiary Designations. This can result in a loss of inheritance for your family. With retirement accounts like IRAs or 401(k)s, properly designating beneficiaries is essential to avoid the loss of further income tax deferral at death. If you don’t have primary and contingent beneficiaries named on all your accounts, these assets will have to go through probate and could cost unnecessary IRD taxes.
5. Improper Titling of Business Interests. A business is frequently titled only in the name of the business owning spouse. However, when that spouse dies, the business itself must go through the costly process of probate, which can create issues for the operation of the company.
6. Bad Choices for Ownership & Beneficiary Designations on Life Insurance. Life insurance can be a great financial planning tool and provide liquidity. It can also be a great wealth transfer tool in estate planning or business planning. However, if the ownership and beneficiaries are done incorrectly, the life insurance benefits can be subject to estate taxes. Ask an experienced estate planning attorney about an irrevocable life insurance trust (ILIT).
7. Giving the Wrong Assets to your Heirs. A common mistake that people make in wealth transfer planning, is to leave a percentage of their estate to their children, another to their grandchildren and another to their favorite charities (or Donor Advised Fund) in their will or via a trust. However, this isn’t the smartest way to distribute your assets from a tax perspective. Doing so could subject them to IRD taxes. Instead, use IRA (and other IRD assets such as 401k) for your gifts to charity and, give non-IRD assets (such as cash, real estate, life insurance, or a Roth IRA) to your children and grandchildren.
Reference: Forbes (Dec. 15, 2021) “Top 7 Tax Mistakes Made in Planning a Wealth Transfer”

New Considerations in Planning and the Stepped-Up Basis

New circumstances give rise to new abilities for estate planners. This, in turn, is creating some new and difficult choices. With the new ability to minimize estate taxation, known as “portability,” there is now a choice between the automatic portability plan and the old standby of the trust-based plan, notably the credit shelter trust plan. One important detail driving the choice is the “step up in basis,” as pointed out in a recent Forbes article titled “Portability Plans Vs Credit Shelter Plans Round 1: Step Up in Basis.” As you may know, the laws surrounding estate and wealth transfer planning underwent a tumultuous change with ATRA. Time was, we spent our planning sessions looking over our shoulder to see what the status of the estate tax was, but that is a gentler beast these days. Nevertheless, there are new competing concerns for which to plan. The old planning techniques aren’t necessarily less useful today, but our motivations may have changed. To learn more about the old tricks, there are a few related Forbes articles worth perusing: “Planning for Married Couples After ATRA: The Simple Portability Based Plan” and Part 2 thereto. So what’s the lesson on the step up in basis? A “step up in basis” is a somewhat subtle effect, but one that’s not to be overlooked. After all, the basis of an asset will determine the taxable value to your heirs, so to have the basis stepped up at various stages can only help cut the overall tax bill. Consequently, any plan that lets you do this can be useful. It’s not quite so simple but, depending upon the assets, simply using the “portability plan” can help realize the greatest tax savings and the original article runs through the scenarios to show you some hard math on how it works. Whether you have an old plan in place or if you’re just now looking to set up your estate plan, there are simply more considerations to be made these days and assessments like cost basis can make all the difference. It’s important to seek competent estate planning legal counsel to help chart the best course for your assets and the needs of your family.

Reference:

Forbes (April 8, 2014) “Portability Plans Vs Credit Shelter Plans Round 1: Step Up in Basis”

            Forbes (March 18, 2014) “Planning for Married Couples After ATRA -- Part I”

            Forbes (March 25, 2014) “Planning for Married Couples After ATRA -- Part 2”

For more information, see www.jerryreiflawyer.com

Avoiding The 2013 Capital Gains Gotcha Saginaw, MI

Did you know there's a new tax bite effective January 1, 2013? For example, unless you have been paying close attention to capital gains and your expected tax hit for 2013, then you might not realize the pain until tax season. For those in the know, however, there is still time to beat the capital gains tax in 2013 and beyond. For some ideas to consider before it is too late, take a look at a recent Forbes article titled “How To Beat The Big 2013 Capital Gains Tax Hike.” The Great Capital Gains Tax Hike of 2013 was essentially the double-pronged effect of the eclipse of certain tax cuts mixed with a brand new surtax. More specifically, the gains tax was allowed to bounce from 15% to 20%, and Obamacare added to the pain with a new 3.8% surtax to high earners. If you are doing the math, then that equates to a new rate of 23.8% for many (a near 60% increase from the year then ended). So how do you beat it? Here are 11 strategies to consider, according to Forbes: 1. Invest in your primary residence. 2. Manage your tax bracket. 3. Harvest losses. 4. Gifts to family members. 5. Gifts to charity. 6. Feed retirement accounts. 7. Open a 529 college savings account. 8. Buy and hold. 9. Move to a tax-friendlier state. 10. 1030 exchanges. 11. Charitable trusts. Each of these strategies has merit. Nevertheless, the key is to evaluate them (and others) with your professional advisors in the context of your medium and short-term financial and estate planning goals. The tax “tail” should never automatically control the planning “dog.”

Reference: Forbes (September 13, 2013) “How To Beat The Big 2013 Capital Gains Tax Hike”

For more information, see www.jerryreiflawyer.com

 

Avoiding The 2013 Capital Gains Gotcha Mid-Michigan

Did you know there's a new tax bite effective January 1, 2013? For example, unless you have been paying close attention to capital gains and your expected tax hit for 2013, then you might not realize the pain until tax season. For those in the know, however, there is still time to beat the capital gains tax in 2013 and beyond. For some ideas to consider before it is too late, take a look at a recent Forbes article titled “How To Beat The Big 2013 Capital Gains Tax Hike.” The Great Capital Gains Tax Hike of 2013 was essentially the double-pronged effect of the eclipse of certain tax cuts mixed with a brand new surtax. More specifically, the gains tax was allowed to bounce from 15% to 20%, and Obamacare added to the pain with a new 3.8% surtax to high earners. If you are doing the math, then that equates to a new rate of 23.8% for many (a near 60% increase from the year then ended). So how do you beat it? Here are 11 strategies to consider, according to Forbes: 1. Invest in your primary residence. 2. Manage your tax bracket. 3. Harvest losses. 4. Gifts to family members. 5. Gifts to charity. 6. Feed retirement accounts. 7. Open a 529 college savings account. 8. Buy and hold. 9. Move to a tax-friendlier state. 10. 1030 exchanges. 11. Charitable trusts. Each of these strategies has merit. Nevertheless, the key is to evaluate them (and others) with your professional advisors in the context of your medium and short-term financial and estate planning goals. The tax “tail” should never automatically control the planning “dog.”

Reference: Forbes (September 13, 2013) “How To Beat The Big 2013 Capital Gains Tax Hike”

For more information, see www.jerryreiflawyer.com

 

The Joy Of Inheriting Appreciated Property Saginaw, MI

The transfer of any asset from an estate to an heir can trigger tricky tax issues. Sometimes things can get even more difficult when it comes to a tricky tax like the capital gains tax, so it is worth knowing the ground rules ahead of time. ElderLawAnswers.com recently considered this subject and the key rules of thumb in an article titled “Do You Pay Capital Gains Taxes on Property You Inherit?” In the normal course of things post-mortem, the estate pays any state and federal estate taxes, then the heirs might even pay a state inheritance tax. Thereafter, if the heirs sell any inherited asset, then they may not pay any capital gains taxes if the asset is sold at or below its date of death value. This is the magic of what is called the “stepped-up basis.” Capital gains are always measured by the “basis”, or the original value to the person being taxed (that is how you measure appreciation, after all). This becomes tricky, however, if the asset in question is “gifted” to an heir while the owner is alive. When this occurs, then the heir is stuck with the original “basis” of the one who gifted the asset. For example, a home purchased in 1972 and “gifted” in 2013 most certainly will have substantial appreciation given real estate values over 40 years. If the home is later sold by the donee, then substantial capital gains taxes will be owed. On the other hand, the same home inherited in 2013 by the same heir can be sold with some 40 years of appreciation stepped-up to current fair market value and sold with minimal, if any, capital gains taxes owed. The capital gains tax is anything but simple. Accordingly, consider this a brief introduction to a complex subject. The simple point to take away is that the timing of wealth transfer has serious tax consequences. Fortunately, capital gains taxes can be minimized, if not prevented.

for more infosrmation, see www.jerryreiflawyer.com

 

The Joy Of Inheriting Appreciated Property Mid-Michigan

The transfer of any asset from an estate to an heir can trigger tricky tax issues. Sometimes things can get even more difficult when it comes to a tricky tax like the capital gains tax, so it is worth knowing the ground rules ahead of time. ElderLawAnswers.com recently considered this subject and the key rules of thumb in an article titled “Do You Pay Capital Gains Taxes on Property You Inherit?” In the normal course of things post-mortem, the estate pays any state and federal estate taxes, then the heirs might even pay a state inheritance tax. Thereafter, if the heirs sell any inherited asset, then they may not pay any capital gains taxes if the asset is sold at or below its date of death value. This is the magic of what is called the “stepped-up basis.” Capital gains are always measured by the “basis”, or the original value to the person being taxed (that is how you measure appreciation, after all). This becomes tricky, however, if the asset in question is “gifted” to an heir while the owner is alive. When this occurs, then the heir is stuck with the original “basis” of the one who gifted the asset. For example, a home purchased in 1972 and “gifted” in 2013 most certainly will have substantial appreciation given real estate values over 40 years. If the home is later sold by the donee, then substantial capital gains taxes will be owed. On the other hand, the same home inherited in 2013 by the same heir can be sold with some 40 years of appreciation stepped-up to current fair market value and sold with minimal, if any, capital gains taxes owed. The capital gains tax is anything but simple. Accordingly, consider this a brief introduction to a complex subject. The simple point to take away is that the timing of wealth transfer has serious tax consequences. Fortunately, capital gains taxes can be minimized, if not prevented.

Reference: ElderLawAnswers.Com (August 7, 2013) “sDo You Pay Capital Gains Taxes on Property You Inherit?

For more information, see www.jerryreiflawyer.com

Going Once, Going Twice …Can You Sell Your Business in Time? Saginaw, Michigan

So little time, yet so much to do! That seems to be the theme as we near the end of 2012. Hopefully Congress will get to work and hammer out a deal to avoid the “fiscal cliff” (and trigger another recession). Regardless, it certainly looks like 2013 still won’t be quite as advantageous as the current tax code. This especially is the case if you’re looking to make a major sale that will invoke capital gains taxation. Accordingly, you’d better get to work and get that sale completed before the ball drops in Times Square! For business owners considering the sale of their businesses, this advice includes you. In fact, you will be interested in a recent article in The Wall Street Journal titled “Looming Tax Hike Motivates Owners to Sell.” As you likely know, the first tsunami to hit will be the automatic relapse in the tax code to pre-Bush era days, with an effective increase in capital gains taxation from a current 15% to a less advantageous 20%. And it gets worse: the Affordable Care Act (Obamacare) tacks on an extra 3.8% to capital gains that also goes into effect next year. Bottom line: capital gains will increase to 23.8% (that’s an increase of almost 60%!). It’s yet to be seen what the lame-duck Congress will do with their time or how they’ll solve this problem. But it seems unlikely that Obamacare and that extra 3.8 % surcharge is going anywhere. That alone is enough to encourage some business owners to advance their sale dates to 2012. It might already be too late to sell your business. Nevertheless, there may be time yet or other transfers besides. Looking for an example? Well it’s worth noting that George Lucas didn’t wait until January to sell his company, Lucasfilm, to Disney, potentially shaving $176 million off his would-be tax bill.

References: The Wall Street
Journal (November 1, 2012) “Looming Tax Hike Motivates Owners to Sell”

The Trust Advisor (November 4, 2012) “Disney Deal Gives George Lucas a
Billion-Dollar Tax Break”

For more information, see www.jerryreiflawyer.com

 

Going Once, Going Twice …Can You Sell Your Business in Time? Saginaw Michigan

So little time, yet so much to do! That seems to be the theme as we near the end of 2012. Hopefully Congress will get to work and hammer out a deal to avoid the “fiscal cliff” (and trigger another recession). Regardless, it certainly looks like 2013 still won’t be quite as advantageous as the current tax code. This especially is the case if you’re looking to make a major sale that will invoke capital gains taxation. Accordingly, you’d better get to work and get that sale completed before the ball drops in Times Square! For business owners considering the sale of their businesses, this advice includes you. In fact, you will be interested in a recent article in The Wall Street Journal titled “Looming Tax Hike Motivates Owners to Sell.” As you likely know, the first tsunami to hit will be the automatic relapse in the tax code to pre-Bush era days, with an effective increase in capital gains taxation from a current 15% to a less advantageous 20%. And it gets worse: the Affordable Care Act (Obamacare) tacks on an extra 3.8% to capital gains that also goes into effect next year. Bottom line: capital gains will increase to 23.8% (that’s an increase of almost 60%!). It’s yet to be seen what the lame-duck Congress will do with their time or how they’ll solve this problem. But it seems unlikely that Obamacare and that extra 3.8 % surcharge is going anywhere. That alone is enough to encourage some business owners to advance their sale dates to 2012. It might already be too late to sell your business. Nevertheless, there may be time yet or other transfers besides. Looking for an example? Well it’s worth noting that George Lucas didn’t wait until January to sell his company, Lucasfilm, to Disney, potentially shaving $176 million off his would-be tax bill.

References: The Wall Street Journal (November 1, 2012) “Looming Tax Hike Motivates Owners to Sell”

The Trust Advisor (November 4, 2012) “Disney Deal Gives George Lucas a Billion-Dollar Tax Break”

For more information, see www.jerryreiflawyer.com

 

Going Once, Going Twice …Can You Sell Your Business in Time? Saginaw Michigan

So little time, yet so much to do! That seems to be the theme as we near the end of 2012. Hopefully Congress will get to work and hammer out a deal to avoid the “fiscal cliff” (and trigger another recession). Regardless, it certainly looks like 2013 still won’t be quite as advantageous as the current tax code. This especially is the case if you’re looking to make a major sale that will invoke capital gains taxation. Accordingly, you’d better get to work and get that sale completed before the ball drops in Times Square! For business owners considering the sale of their businesses, this advice includes you. In fact, you will be interested in a recent article in The Wall Street Journal titled “Looming Tax Hike Motivates Owners to Sell.” As you likely know, the first tsunami to hit will be the automatic relapse in the tax code to pre-Bush era days, with an effective increase in capital gains taxation from a current 15% to a less advantageous 20%. And it gets worse: the Affordable Care Act (Obamacare) tacks on an extra 3.8% to capital gains that also goes into effect next year. Bottom line: capital gains will increase to 23.8% (that’s an increase of almost 60%!). It’s yet to be seen what the lame-duck Congress will do with their time or how they’ll solve this problem. But it seems unlikely that Obamacare and that extra 3.8 % surcharge is going anywhere. That alone is enough to encourage some business owners to advance their sale dates to 2012. It might already be too late to sell your business. Nevertheless, there may be time yet or other transfers besides. Looking for an example? Well it’s worth noting that George Lucas didn’t wait until January to sell his company, Lucasfilm, to Disney, potentially shaving $176 million off his would-be tax bill.

References: The Wall Street Journal (November 1, 2012) “Looming Tax Hike Motivates Owners to Sell”

The Trust Advisor (November 4, 2012) “Disney Deal Gives George Lucas a Billion-Dollar Tax Break”

For more information see www.jerryreiflawyer.com

 

Business Succession Rejections by Heirs

When it comes to the succession plans of a family business, there are many things to ponder when selecting an heir. Important attributes like responsibility, work ethic, and leadership are taken into consideration when deciding who choose for the business. One thing that you may have left out is what to do if your heir turns down the offer to take over the family business. Then what? If you are a family business owner, are you intending to keep the business in the family even as you step down from control? Have you considered the possibility of designating an heir who does not want the family business and do you have a “Plan B” to adjust your succession plans accordingly? The reasons why an heir may resist taking up the reins to the family business are many facetted, but that doesn’t necessarily mean they are making a final, informed decision. No, it may take time, talk, and some understanding, and there are lessons to be gleaned from a recent Forbes article on the subject titled “5 Ways Family Business Founders Can Change A "Made Up" Mind.” Deciding on a successor for your business can take patience, time and understanding. This aspect of estate planning isn’t just about your own wishes, but also about the hopes and dreams of your family members and heirs involved.

Reference: Forbes
(September 10, 2012) “5 Ways Family Business Founders Can Change A
"Made Up" Mind

Reducing Taxes By Minding Your Cost Basis

Investing and taxation can be tricky things, especially if you have been investing for some time. This can get even trickier when you transfer assets to loved ones or contemplate doing so. Taxation hinges on a few fundamental numbers, one of which is the cost basis. Given some interesting changes to the law governing cost basis, you may need to rethink your plans. If you have investment accounts, then you likely are aware of some of the changes that have begun to take effect and will continue to roll out through 2013. One of the most obvious changes was recently addressed in a Morningstar article titled “Beware the Default Method for Cost-Basis Elections.” Are you aware of the difference between the old style of cost basis election and the new possibilities your brokerage firm or mutual fund company can offer? Essentially, the old system of electing a cost basis was typically in the hands of the investor since they had to track and record their own cost basis on various investments. This meant averaging out the cost basis when selling various stocks at tax time. Now the cost basis is directly reported to the IRS from the firm/broker. Companies tend to offer the default means of reporting, but since information is going directly to the IRS, this also means there is enough information for specific-share identification in the cost basis election. The Morningstar article offers some interesting math to support why this actually can be advantageous for the crafty planner. The bottom line is that any trimming you can safely accomplish can secure more favorable capital gains taxation. Why? Because this cost basis carries over into another magic taxation number, the stepped-up basis, when investment assets are transferred. In short, small numerical changes add up and may affect your overall wealth-transfer planning.

Reference: Morningstar (March 26, 2012) “Beware the Default Method for Cost-Basis Elections”

Selling Your Family Business with The Tax Wind At Your Back

Whether we’re coming out of the recession is still very much in debate. Nevertheless, at least for some small businesses, the balance sheets are starting to look a bit better. Having weathered the storm, some business owners are now ready to get out. According to a recent New York Times article, 2012 is going to be the time to sell the business for some owners. “Buy low, sell high” is conventional market wisdom. To some business owners coming out of the rut with a good year behind them, right now may be the “high sales” they’ve been awaiting. Yet for some investors right now may still be the “low buys” with an eye for growth. Behind the scenes, however, there’s more than simple market dynamics afoot in 2012. As you may recall, it also is the last year of the Bush-era tax cuts as they were extended only until the end of 2012. So, if you’re looking to sell the business, then 2012 will offer a lower capital gains tax rate, at 15% instead of the 20% slated to fall into place come next January. If your business IS your personal wealth, then this is real money for your future and for your family’s future. Why are you waiting? Unless you intend to keep you family business in the family, the tax planets are beautifully (albeit temporarily) aligned with those same Bush-era tax cuts in place – and the generous Gift and Estate tax levels. Accordingly, I recommend a consultation with your trusted accounting, legal and financial advisors without delay.