Under the now-repealed estate tax laws, property passing from a decedent used to receive a step-up in cost basis equal to the property's fair market value as of the decedent's date of death. That tax benefit has been eliminated for persons who die in 2010, and instead, the basis of property acquired from a decedent will be the lesser of the decedent's adjusted basis or the property's fair market value on the decedent's date of death. Under this rule, it is possible that the cost basis of property will be stepped down.
These new carryover basis rules will not only cause the imposition of capital gains taxes that previously were avoided following a person's death, but the beneficiaries who inherit your estate now need to know what your cost basis was in the properties they receive. In this regard, you should endeavor to organize your records so that the beneficiaries of your estate will be able to calculate your cost basis in the properties you own. For many people who inherit property in 2010, records will not exist or will be incomplete, thus making it difficult or impossible for them to determine a particular property's cost basis.
There are two important exceptions to the carryover basis rules. A decedent's Executor is allowed to allocate up to $1,300,000 to various assets owned by a decedent, thereby increasing the cost basis of those assets. Also, an additional $3,000,000 of basis increase can be allocated to properties passing to a spouse or to a special "qualified terminable interest property" trust for the spouse (often called a "QTIP" trust or a "marital" trust). Under the tax laws in 2010, just like the laws which existed prior to estate tax repeal, any person may give an unlimited amount of property to his or her spouse or to a QTIP trust (the "Marital Deduction") without generating any gift or estate taxes.
For estate planning help, contact Peterson Law Group.