Receiving Assets Through An Estate

Peter VanderWoude, CPA, CGMA

November 1, 2016

Many senior citizens give sizeable gifts during their lifetimes to their children. Last month we went over the tax aspects of making gifts. A scenario was presented in which a mother gave her five children Google stock valued at $100,000 which she bought years ago for $10,000. Each of those children, if they sold the stock right away, would report one fifth of the $90,000 capital gain of $18,000 on their income tax returns.

What if the five children in this example received the same Google stock through a bequest from their mother’s estate? Zero capital gain. Why?

One of the benefits to the five children of receiving assets through mother’s estate is that the cost-basis of the asset would be “stepped up” to market value of the asset on the date mother became deceased. In this example, if each of the five children sold the Google stock right away they would each report a sale of $20,000 and cost-basis of $20,000 for zero gain.   

This is an awesome tax advantage. The reasoning behind the “step up” in cost-basis is when mother’s estate assets are totaled and liabilites paid, that the taxes due on the net value of her estate will have already been paid or covered by the combined lifetime estate and gift exemption of $5.45 million—adjusted for the value of individual annual gifts above the annual gift exclusion of $14,000 made during her lifetime and reportable on a gift tax return.

This year it is estimated that 99.8 percent of all estates will not owe a federal estate tax. New York State has been increasing its exemption and it will equal the federal exemption in 2019. Currently, New York State’s gift and estate exemption is $4.1875 million. 

Even if you do not have a sizable estate, there are still plenty of reasons to plan how to transfer your assets to your heirs. Whether you make gifts during your lifetime, or plan to hold some highly appreciated assets to transfer through your estate so your heirs will receive a “step up” in cost basis of the asset, it behooves you to sit down with a tax professional.

Please note: if you receive a traditional IRA through an estate, that IRA is usually entirely taxable to you as the recipient. Receiving a Roth IRA, on the otherhand, is not taxable. 

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