Trust & Estate Quick Tip #9: Does beneficiaries have to pay taxes on their inheritance?

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When an individual passes away, the transfer of their assets to beneficiaries named in a will or to their heirs in the absence of any documented instructions results in a new cost basis for those assets. This means that the value of the assets is adjusted to what is known as a "step-up" in basis.

To illustrate this concept, let's consider the scenario where you purchased Apple stocks for $10, and over the course of 30 years, their value increased to $100. If you were to sell the stocks before your death, you would be subject to capital gain taxes on the $90 of appreciation.

However, if you were to pass away while still holding the stocks and they are subsequently inherited by your beneficiaries, the stocks would receive a new cost basis equal to their fair market value at the date of your death, which in this case is $100. This means that the built-in appreciation, which would have otherwise been subject to capital gain taxes, is completely eliminated. Therefore, it can be advantageous to transfer assets to beneficiaries upon death rather than gifting them during your lifetime.

It is important to note that the step-up in basis applies to various types of assets, but cash and retirement accounts are excluded from this provision. The step-up in basis refers to adjusting the cost basis of an inherited asset to its fair market value at the time of the original owner's death.

If you have any further inquiries or require clarification, please do not hesitate to reach out to us at info@estateandprobatelawyer.com!

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