Estate / Income Tax Planning with the Stepped-Up Cost Basis. Part 1 of 3.

This is 1 of 3 blog posts on this subject of stepped-up cost basis.

Congress in early 2013 essentially converted our federal estate tax system into an income tax system.   For most people not in the wealthiest top 1%, they will face at death greater income tax exposure, with the corresponding benefit of paying no estate tax. The top 1% will likely pay estate tax.

Here is a question this 99% group needs to ask their advisors: “Does my estate planning include income tax savings features?”  If not, your planning misses the mark, in my opinion.

One highly beneficial income tax-savings feature for estate planning is to build-in flexible options for maximizing the stepped-up cost basis when each spouse dies. This flexibility ideally also must give the surviving spouse, at the time of the first spouse’s death, the ability to opt-out of this income tax planning.


This income tax savings is beneficial only if the married couple will pay no estate tax. Essentially, it can produce significant income tax savings as long as the married couple remains in the no-estate tax 99% group. More pointedly, this stepped-up basis is crucial in reducing the taxable gain for income tax purposes when the after-death property is sold, including, very powerfully, property that has been depreciated.

This next point is important.

This stepped-cost cost basis treatment for income tax purposes has different results if you receive, for example, property from John Doe as a gift versus receiving property from John Doe when John dies. Death transfers under the tax law are better for reducing the income tax on this gain situation. Gift transfers typically do not produce this income tax savings. I will illustrate these two concepts in my next blog post.

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