Estate planning - step up question

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Estate planning - step up question

Post by friar1610 » Thu Aug 17, 2017 9:12 pm

This question occurred to me after reading a few recent posts on estate planning...

This is the overall scenario: my spouse and I have two kids who will get everything (except for what goes to charity.) My spouse and I hold all of our assets (less our IRAs) jointly. We are each beneficiaries on the other's IRAs. In addition, we have reciprocal wills in which everything is left to the survivor. The question concerns our assets eligible for step-up tax treatment after one of us dies and the survivor wants to leave everything to the two kids.

I understand that if the assets are bequeathed via the will and through probate the value of taxable holdings will step-up to the value on the date of decease. Thus, if our kids sold the holdings right away there would likely be no (or minimal) capital gains tax due.

But what if the survivor makes them beneficiaries and the holdings pass to them as such rather than via probate? What is their basis? The same as my/my spouse's basis was? Or does the basis also strep-up as it would have via probate? I just want to be sure that in my desire to make things simple procedurally I don't stick the kids with a bigger tax bill than necessary if the sell the holdings.

Thank you.

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Re: Estate planning - step up question

Post by bsteiner » Thu Aug 17, 2017 9:48 pm

It may cause lots of problems, but you'll still get the basis step-up.

It will throw the children's inheritances into their estates for estate purposes, and expose them to their creditors and spouses. If you left their inheritances to them in separate trusts rather than outright, their inheritances would not be included in their estates for estate tax purposes, and would be protected from their creditors and spouses.

It may also complicate the estate administration. For example, suppose one child didn't cooperate in paying your debts and expenses, filing your final income tax return and paying any taxes due, filing your estate tax return and paying any taxes due, selling your home, etc.

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Re: Estate planning - step up question

Post by Gill » Fri Aug 18, 2017 7:07 am

Probate has nothing to do with basis. If a capital asset is included in your estate for estate tax purposes it gets a step up. Note, IRA's, Savings Bonds and the like are ordinary income assets, not capital assets.

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