Estate Planning | Making a Difference One Family at a Time

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We are going to look at the question of taxes on appreciated assets in this post. After we provide an explanation of the step-up in basis, we will conclude with an overview of the potential impact of the other types of taxes.

Basis Reset

Let’s say that your grandmother passes away and she leaves you shares of stock that are worth $150,000, and the shares were worth $50,000 when she acquired the stock. She would have been required to pay the capital gains tax if she would have realized the gain while she was living.

However, she never sold the stock, so no capital gains tax has been paid on the appreciation. You would not have to pay it either because the assets would get a stepped-up basis to $150,000, and you would be responsible for future gains above this amount that are realized.

At the present time, the long-term rate is 15 percent for people that claim between $40,401 and $445,850. For those that report income that exceeds the top figure, the rate is 20 percent, and people that claim less than $40,401 are exempt from long-term capital gains taxes.

Short-term gains are gains that are realized less than a year after the asset has been required, and they are taxed at your regular income tax rate.

At the time of this writing, Congress is working on a measure that includes an increase in the top rate for long-term capital gains. It would go up to 25 percent for filers that claim $400,000 or more.

Income Taxes

Some people are pleasantly surprised to hear that inheritances are not subject to regular income taxes. This is because taxes have already been paid by the person that is leaving the inheritance with a couple of exceptions.

Traditional individual retirement accounts are funded with pretax earnings, so distributions to the primary account holder or a beneficiary are taxable. The tax situation is reversed with Roth accounts, so distributions are not taxed.

If you are the beneficiary of a trust and you receive distributions of the earnings, they would be taxable, but distributions of the principal would not be subject to taxation.

Estate Taxes

There is a federal estate tax that carries a 40 percent rate, but the majority of families do not have to pay it because there is an $11.7 million exclusion. This is the amount that can be transferred tax-free, and the remainder would be subject to this tax.

The House Ways and Means Committee has put together a tax bill that would reduce this figure to right around $6 million next year. If the value of your estate exceeds $6 million, you should pay close attention to this matter.

We have a state-level estate tax here in Connecticut with a contact form on this site you can use if you would like to send us a message.

Barry D. Horowitz, Estate Planning Attorney
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