Kitces has made available for download their article, “Maximizing The Step-Up In Basis By Gifting Assets Between Spouses”, published on Kitces. The Executive Summary begins as follows:
While President Joe Biden’s recently proposed “Build Back Better” brought the possibility of a reduced estate tax exemption for 2022, insufficient support for the bill precluded the reduction, leaving taxpayers with an exemption of $12,060,000 per person. Which means that under the current rules, most taxpayers will not be subject to a Federal Estate tax liability and can instead focus their tax planning efforts on reducing their Federal income tax liability. As such, the step-up in basis at death can be a powerful planning tool for minimizing an individual’s capital gains taxes from the sale of appreciated assets. For married couples, though, the death of one spouse often only results in a partial step-up, reducing the value of this tax benefit (and thereby potentially increasing taxes on the subsequent sale of assets) for the surviving spouse. But with some proactive planning, couples can take greater advantage of the step-up rules by titling their assets in a way that maximizes their likelihood of a full step-up.
The concept of the step-up is that, when an individual dies, the basis of the assets that they owned is increased (or “stepped up”) to their value as of the date of the individual’s death. And while the concept is fairly straightforward for assets owned solely by the decedent, it can become more complicated when the assets are owned jointly with a spouse. Because in most states (which treat jointly-owned assets as “separate property”), even though the assets are owned in both spouses’ names, the amount that is included in the decedent’s estate – and therefore eligible for the step-up – is only 50% of the assets’ value, leaving the original basis intact on the surviving spouse’s remainder. Notably, ten “community property” states allow for a 100% step-up in basis on all jointly-held assets (as long as they meet the definition of community property). Which means that, based on whether or not a couple happens to live in a community property or a separate property state, they may receive a full (or just a partial) step-up in basis on their jointly-owned assets when one spouse passes away.
To read the full report, click: “Maximizing The Step-Up In Basis By Gifting Assets Between Spouses”
Posted by Anthony Tran, Associate Editor, Wealth Strategies Journal