As some New York residents may know,the laws governing federal estate tax have changed. While estate planning is always important, reevaluating that plan on a routine basis is essential. Federal estate tax rules and regulations were modified in 2012. Ten years earlier, an estate valued at more than $1.5 million would be subject to an estate tax at a rate of up to 47 percent of the excess. In 2012, the federal estate tax exemption was increased to $5 million subject to inflation adjustments, and the exemption currently stands at $5.43 million.
The effect of this increase is that very few people will have to worry about having to pay federal estate taxes. However, income tax paid on inherited assets when they are sold will continue to be an issue. Understanding how taxes are determined in this situation is essential.
Generally, when an asset is sold, there is a difference between the sale value and the seller’s basis in that asset. With respect to a non-depreciable asset that was purchased and later sold, in general the taxable gain is measured by the difference between the sale price and the price that was paid for it, with the purchase price being referred to as its cost basis.
If the property is inherited, however, the beneficiary’s basis is deemed to be the fair market value of the asset at the time of the previous owner’s death. This is often referred to as its stepped-up basis, and it can make a difference if the property has appreciated between the time of its original purchase and the date of death. Any capital gain on the subsequent sale of that asset will be measured using its stepped-up basis.
The importance of the federal tax implications of estate planning remains significant, although in large part the focus has switched from estate tax considerations to those related to personal income tax. An estate planning attorney can be helpful in providing an explanation of the possible consequences to a client.