The Step-Up (or Down) in Basis
While the step-up in basis rule at death has been on the chopping block in Washington the past few years, it has maintained its form through each challenge. The cost basis rule, when used correctly, can save the next generation (or surviving spouses) anywhere from 10’s of thousands of dollars to millions in select cases.
As in physics, there is an equal and opposite reaction: in tax law, for all of the benefits offered, there are plenty of situations where they can turn detrimental.
The prime example in my mind is the step-up in basis. Step-up in basis, in its most basic definition, is the adjustment in the cost basis of an inherited asset to its fair market value on the date of the decedent’s death. These investable assets can range from stocks, mutual funds, real estate, precious metals to your home if held outside of a retirement account. Because of the growth in many of these markets over time, planning for the step-up in basis can be an incredibly important element of estate planning.
As many stock market indexes across the board have seen double digit losses so far this year, some recent investors may find themselves holding assets underwater for the time being.
Enter “the Step-down in basis”.
Straight from the definition above, at death the ”adjustment in the cost basis of an inherited asset to its fair market value.” It most certainly doesn’t clarify that the adjustment must be up or down. In financial planning terms, by passing away with an imbedded capital loss in an asset, neither you nor the next generation can use that capital loss to offset other capital gains.
To avoid losing these tax benefits, one must be diligent in knowledgeably tax-loss harvesting later in life.
While we can’t predict where the market will go nor how long we will live, being diligent about both a step-up and step-down in basis can help pass on the most legacy to those we care about.
About the Author: Conner Kolodge
Initially focused in financial compliance, Conner transitioned into personal finance to utilize his knowledge and skills to make meaningful differences in the lives of family and friends. He strives to connect client’s life goals with their finances.
Conner has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine for 2019 and 2020.
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.
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