Wills and Trusts

Wyatt, Tarrant & Combs, LLP

TRANSFER TAX COST VS INCOME TAX SAVINGS FROM “STEP-UP” IN BASIS

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TRANSFER TAX COST VS INCOME TAX SAVINGS FROM “STEP-UP” IN BASIS

Generally

Measuring the potential transfer tax costs against the income tax savings that would arise from a “step-up” in basis is not easy because under current law the Applicable Exclusion Amount will continue to increase.  Both the rate of inflation and the lifespan of the client are outside the planner’s control.  In addition,  as mentioned in the previous section, if the client dies in a state that has a death tax, the calculation of the transfer tax cost will be complicated by that state’s exemption and rate.  Third, the income tax savings of the “step-up” in basis must be measured in relation to the beneficiaries who may live in a different state than the decedent.

Although a “step-up” in basis is great in theory, no tax will be saved if there is a loss at the time of death resulting in a “step-down” in basis or the asset is income in respect of a decedent[1] (IRD).  Furthermore, even if the assets will benefit from a significant “step-up” in basis, will anyone benefit?  Many assets, like family-owned businesses, may never be sold or may be sold so far in the future that the benefit of a step-up is attenuated. On the other hand, if the asset that receives a “step-up” in basis is either depreciable or depletable under the Code,[2] the deductions that arise do result in tax benefits to the owners of that asset.  Similarly, an increase in the tax basis of an interest in a partnership or in S corporation shares may not provide immediate tax benefits, but they do allow additional capacity of the partner or shareholder to receive tax free distributions from the entity.[3]  These concepts and how certain assets benefit or don’t benefit from the basis adjustment at death will be discussed in more detail in the next posts.

Turney P. Berry

Louisville, Kentucky

 

[1] § 691.

[2] See e.g., § 1016(a)(2).

[3] See e.g., §§ 731(a)(1) and 1368(b).

Leave a reply. Please note that although this blog may be helpful in informing clients and others who have an interest in information privacy and security, it is not intended to be legal advice. The information on this blog also should not be relied upon to form an attorney-client relationship.

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