A Tax Planning Strategy for Smaller Estates

Utilizing the step-up in basis rule may be a useful tax strategy for parents with a goal of transferring wealth to their children who do not anticipate having an estate or inheritance tax liability upon their death.

Consider an elderly parent with a short life expectancy and a net worth well below the federal lifetime gift and estate tax exemption, living in a state with no applicable estate or inheritance taxes, with a goal of leaving all of their assets to their only child.  One of the parent's assets is a brokerage account with a fair market value of $1,000,000, an adjusted basis of $100,000, and an unrealized capital gain of $900,000.

If the parent gifts the brokerage account, the child would assume ownership with an adjusted basis of $100,000.  If the child immediately sold the entire gifted brokerage account, they would report $900,000 of realized capital gain on their income tax return that year.

In contrast, if the parent died, and the brokerage account was included in their gross estate, it would receive a step-up in basis from $100,000 to its then-current fair market value of $1,000,000.  If the child immediately sold the entire bequested brokerage account, they would have no capital gains tax consequences (i.e., fair market value of $1,000,000, adjusted basis of $1,000,000, and capital gain of $0).

In this case, by minimizing their child's subsequent income tax consequences, the parent would transfer more after-tax wealth to their child via a bequested brokerage account.

If you are a prospective client and would like to learn more about hiring us for a financial consultation, where, among other things, we would review your goals and provide tax/estate planning recommendations, please visit our Schedule Meeting page.



Mike McErlane, DO, MBA, CFP^®, CFA^®, RICP^®, EA, MCEP^®

Mike McErlane is the owner and founder of Comprehensive Financial Planning for Doctors, LLC based in Frisco, Texas.

Comprehensive Financial Planning for Doctors, LLC (CFPFD) is an Investment Adviser registered with the Texas State Securities Board.  Registration of an Investment Adviser does not imply any specific level of skill or training.  CFPFD only transacts business in states or jurisdictions in which it is registered or exempt from registration.  A copy of CFPFD's current disclosure brochure is available through the Securities and Exchange Commission's Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

The opinions and analyses described are subject to change at any time without notice.  Any information is considered general and is not intended to provide any specific advice or recommendations.  Your use of the information is at your sole risk.  You should consult with your financial advisor, attorney, tax advisor, insurance agent, or other professional advisor before taking action on any information or implementing any strategy.