What Assets Do Not Get a Step-up in Basis?
When someone passes away, their assets are typically transferred to their beneficiaries. In most cases, the value of these assets is determined based on their fair market value at the time of the owner’s death. This is referred to as a “step-up in basis,” as the cost basis of the assets is increased to their current value. However, not all assets receive a step-up in basis. Let’s explore which assets do not get a step-up in basis and what implications this has for beneficiaries.
1. Retirement Accounts: Assets held within retirement accounts, such as 401(k)s or IRAs, do not receive a step-up in basis. Instead, beneficiaries will generally owe income taxes on the distributions they receive.
2. Life Insurance Proceeds: The proceeds from a life insurance policy are generally not subject to income taxes. However, they do not receive a step-up in basis as they are considered tax-free income.
3. Gifts: If the deceased individual had gifted assets during their lifetime, these assets do not receive a step-up in basis. The original cost basis remains the same for the beneficiary.
4. Jointly Owned Property: Assets held jointly with rights of survivorship typically receive a step-up in basis only for the deceased owner’s share. The surviving owner’s share retains its original cost basis.
5. Trust Assets: Assets held within a trust may or may not receive a step-up in basis depending on the type of trust and its provisions. It is important to review the trust documents to determine how the assets will be treated.
6. Annuities: The cost basis of annuities does not receive a step-up at the owner’s death. However, any gains or income the beneficiary receives after the owner’s death may be subject to income taxes.
7. Property Subject to a Qualified Conservation Easement: If the deceased individual had entered into a qualified conservation easement before their death, the property subject to the easement does not receive a step-up in basis.
1. What is a step-up in basis?
A step-up in basis is an adjustment to the cost basis of an asset to its fair market value at the time of the owner’s death, minimizing capital gains taxes for beneficiaries.
2. Do all assets receive a step-up in basis?
No, assets such as retirement accounts, life insurance proceeds, gifts, jointly owned property, trust assets, annuities, and property subject to a qualified conservation easement do not receive a step-up in basis.
3. Are beneficiaries responsible for taxes on assets that do not receive a step-up in basis?
Beneficiaries may owe income taxes on distributions from retirement accounts, annuities, and gains or income generated from non-step-up assets.
4. Can a beneficiary sell non-step-up assets without incurring capital gains taxes?
If a beneficiary sells non-step-up assets, they may be subject to capital gains taxes on the appreciation from the original cost basis.
5. Should I consult an estate planning attorney to understand the tax implications of non-step-up assets?
Yes, consulting an estate planning attorney can help you understand the tax implications of non-step-up assets and develop strategies to minimize their impact.
6. Can I allocate assets strategically to maximize the step-up in basis for my beneficiaries?
Yes, proper estate planning can help allocate assets strategically to maximize the step-up in basis for your beneficiaries.
7. Are there any exceptions to the non-step-up rule?
There may be specific exceptions or special provisions for certain assets or situations, so it is important to consult a tax professional or attorney to understand the specific rules that apply to your situation.