Wills and Trusts

Wyatt, Tarrant & Combs, LLP

SECTION 1014 AND UNDERSTANDING THE TAX NATURE OF CERTAIN ASSETS

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SECTION 1014 AND UNDERSTANDING THE TAX NATURE OF CERTAIN ASSETS

General Rule: The “Step-Up” in Basis to Fair Market Value

Generally, under section 1014(a)(1) of the Code, the “basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent” is the “fair market value of the property at the date of the decedent’s death.”[1]  The foregoing general rule is often referred to as the “step-up” in basis at death, under the assumption that assets generally appreciate in value.  However, many assets depreciate in value, and this general rule will mean a loss of tax basis to fair market value at date of death (a “step-down” in basis).  For purposes of this outline, we refer to the general rule of section 1014(a)(1) as a “step-up” in basis, whether the asset is appreciated or at a loss at the time of the decedent’s death.

The Code goes on to say that if the executor of the estate elects an alternate valuation date under section 2032 of the Code or special use valuation under section 2032A of the Code, then the basis is equal to the value prescribe under those Code sections.[2]

If land or some portion of such land that is subject to a qualified conservation easement is excluded from the estate tax under section 2031(c) of the Code, then “to the extent of the applicability of the exclusion,” the basis will be the “basis in the hands of the decedent”[3] (“carryover basis”).[4]

If appreciated property (determined on date of the gift) was gifted to the decedent within 1-year prior to the date of death, and the decedent transfers the property back to the original donor of such property (or the spouse of the donor), the property will not receive a “step-up” in basis and it will have the basis in the hands of the decedent before the date of death.[5]  This rule does not apply if the property passes to the issue of the original donor, and it is unclear whether this rule applies if the property is placed in trust where the original donor or donor’s spouse is a potential beneficiary.

 Turney P. Berry

Louisville, Kentucky

[1] § 1014(a)(1).

[2] §§ 1014(a)(2) and (3).

[3] § 1014(a)(4).

[4] § 1015.

[5] § 1014(e).

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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