Inheriting Stocks at a Stepped Up Cost Basis
by
Gregory Grant
Estate taxes are a fact of life that can be minimized with proper financial planning. But what if part of an estate is a stock portfolio? Isn't the person who inherits it subject to capital gains taxes on any gains the stock made since it was bought? The answer is not necessarily.
"How the law works is that if you own a stock and you own it for many, many years it grows dramatically and then you die and you pass it on to your heirs," says Gilda Borenstein of Merrill Lynch. "There's no taxes ever paid on all of that growth which is pretty phenomenal to be able to give that gift to your heirs. The people who inherit it, inherit it at what's called a stepped up cost basis."
A stepped up cost basis is when, for example, a stock which was purchased forty years ago for ten dollars a share and upon the death of the owner, is passed on to the heirs but is now worth, say, $70 a share. But with a stepped up cost basis, there may be no tax due on the capital gain.
"This is a situation in which the law really favors investors," says Borenstein. "What happens is, is that you actually have the choice to pick which date you want the value of that portfolio that you inherited or that one stock you inherited valued. You have your choice either between the date of death or six months after the date of death."
Protecting the value of an estate may be difficult, but a stepped up cost basis is a good way to pass along to heirs accumulated assets while minimizing capital gains tax at the same time.
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