What is step-up basis and why should I know about it? (part 1)

I know I'm a nag. I nag because it's so important to plan now for your family when you die. It's not that we plan to fail, we fail to plan. So what happens to your children when they inherit the family home that is in a trust?

A step-up in basis resets the cost basis of an inherited asset to its market value on the decedent's date of death.

Example: Dad dies and has a house that is owned by a revocable trust. He bought the house for $100,000 in 1970 and transferred it to his trust. Dad has died in 2022 and the house is now worth $1,000,000. The trust does not recognize any income or loss on the transaction on dad's death, but the house receives a stepped-up basis to $1,000,000 in the trust. The house is shown as an asset of the trust.

Dad's only daughter gets the house and is distributed directly to her "in-kind." The daughter's basis in the house is $1,000,000. Hopefully you will see that advantages of a trust over a Will or over nothing at all.

Example: Suppose the dad didn't have his house in a trust and instead has his daughter on the property with him as a joint tenant. What would happen to his daughter?

Same house bought for $100,000 with the daughter as a joint tenant and valued at $1,000,000 at his death. His daughter is now the sole owner of the house. What is the cost basis on the 100% ownership interest? Daughter's original half ownership basis on the purchase is $50,000 plus the added half ownership from her dad or $500,000, equals the daughter's new basis of $550,000. So she wants to sell for $1,000,000 and that is a significant gain!

Everyone is different, so talk to your financial advisor for more information. This is information only and not a substitute for legal or financial advice.

Diana Wade is a Legal Document Assistant. She can be reached at (661) 821-0494 or [email protected]. Diana is not an attorney; she can only provide self-help services at your specific direction. Kern County LDA #185, ex 4/23/23.