Estate Planning & the Importance of the Tax Basis Rules

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Estate Tax Planning Attorney

When doing estate planning, it is critical to understand basic “tax law” issues and their impact on estate planning.

Tax “basis” is a very important term and is related to income taxes. The “tax basis” of an asset owned by an individual when it was purchased and its value at sale or the death of the owner is a critical factor in estate tax and income tax planning.

Tax basis generally begins when an asset is purchased. This includes stocks, bonds, mutual funds, and real estate among other things. When you purchase an asset, the IRS looks at the value of that asset when purchased to determine what, if any, income tax should be paid when and if it is later sold. For example, if you buy a stock at $10 per share and hold it for a period of years and then sell it when it is worth $15 a share, the IRS will identify your tax basis as $10 and your sale value at $15 to net an income taxable amount of $5 per share (aka “capital gains).

It is important to note that taxis basis gets automatically “stepped up” if you own the asset at death. Under the previous scenario, if you bought a stock for $10 that grew into $15 or you owned a piece of property that you paid $250,000 and it’s worth $450,000 when you die, both are revalued at your date of death and the values are included in your taxable estate for estate tax purposes. The good news is their estate tax does not trigger any actual payment requirement unless the estate exceeds $5,430,000 at the federal level, $675,000 for New Jersey. Conversely, while it does not incur an estate tax, the beneficiaries get a “step up” in basis after the death of the original owner to the value at date of death, so any subsequent sale after death may but may not yield no income taxes. When planning, sometimes holding assets until after death has a strategic advantage if they are significantly appreciated.

To discuss your NJ Estate Tax Planning matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.