Florida estate planning and probate attorney Samantha J. Fitzgerald understands how confusing estate planning concepts can be. That’s why she takes the time to explain difficult concepts, like “step up in basis” to her clients in plain language.
Estate taxes, without question, can be a very complicated topic.
Taxes, like death, may not be the most pleasant topic, but it is one that is necessary to understand for estate planning purposes.
Because taxes can eat up a significant portion of your estate. So, a good estate plan drafted by an experienced estate and probate attorney can help avoid or reduce them.
Which is why, in today’s post, we’re talking taxes.
Specifically, we’re going to demystify the concept of “step up in basis” in Florida probate.
What is Capital Gains Tax?
To fully understand the benefit of a step up in basis, you first need to know a little bit about capital gains tax.
Here’s the basics of how capital gains works: when you sell something that has gone up in value over time (i.e., appreciated in value), the difference between what you bought it at and what it costs now, is considered a capital gain. So, for example, if you bought something for $100, and it is worth $150 when you sell it, the appreciation —$50—is considered a capital gain.
Capital gains, then, are the profits you realize when you sell an asset like stocks, bonds, or property. A capital gains tax is triggered only when you sell the asset. Basically, you pay capital gains tax on any asset that is worth more when you sell it than it was worth when you bought it.
The length of time that you hold onto an asset determines the rate of capital gains tax you must pay.
If you hold on to an asset for less than one year, you will be taxed at the short-term capital gains rate —which means you are taxed at your ordinary income tax level.
If, on the other hand, you hold onto an asset for more than one year, the amount of capital gains tax you pay is calculated at the long-term capital gains tax rate. This rate can be anywhere between 0% to 20%.
Notably, Florida does not impose a state income tax, an inheritance tax, or estate tax. As a result, in Florida, individuals do not pay inheritance taxes, estate taxes or state capital gains tax.
What is a “Step Up in Basis” and How Does It Affect Your Estate?
In estate planning, a “step up in basis” is a strategy used to avoid capital gains tax when passing an asset on to heirs.
Generally speaking, when an asset is passed on to a person’s heirs, its value at the time of inheritance is usually more than when it was originally purchased. So, for example, stock purchased at $100 might be worth $150 by the time it is passed on to a decedent’s heirs.
Ordinarily this would mean that the person inheriting would have to pay capital gains tax. But when a person dies, his/her assets get a brand-new tax basis equal to the fair market value at date of decedent’s death (referred to as the “date of death fair market value”). This allows his/her heirs to receive a basis in inherited property that is equal to its “date of death fair market value.” This “steps up” the asset’s value to what it is worth as of the date of decedent’s death—thereby avoiding capital gains tax.
So, using our example above of a stock purchase, this “step up in basis” allows decedent’s heirs to receive decedent’s stock at a brand-new tax basis of $150. When they sell the stock (assuming they sell before it increases in value), they don’t pay any tax.
For married couples, at the time of the death of the first spouse, the surviving spouse is entitled to a step-up in tax basis for ½ of any asset that the couples owned. Florida’s recent Community Property Trust Act (CPTA) may allow Floridians who properly create a Community Property Trust (CPT) to take advantage of the “double step up in basis enjoyed by couples in community property states. In a properly created CPT, at the death of the first spouse, all assets owned by the CPT may receive a new basis equal to the fair market value including the surviving spouse’s ½ interest.
Need Help with Your Estate Planning? Protecting Your Family is Just a Phone Call Away.
Estate planning for taxes is not something you should leave to chance. The estate and probate lawyers at SJF Law Group, can help. We work hard to ensure that your wishes will be followed, and your loved ones taken care of when you are gone. When you work with the estate planning attorneys at SJF Law Group, you get more than just an estate plan: you get peace of mind. Connect with us on Facebook or Instagram or email us at: [email protected] today.