Podcast 92: Can Utilizing the Step-up Basis Save Your Heir’s Tax Dollars?


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Below is a transcription of the Ask Gregory Podcast 92: Can Utilizing the Step-up Basis Save Your Heir’s Tax Dollars?

Gregory Ricks  00:00

Hey, welcome. I’m your host Gregory Ricks a financial advisor here to answer your questions and help you win with your money.

Podcast Intro / Outro  00:10

On today’s episode of the Ask Gregory Podcast, Gregory is joined by Wes Blanchard of WJ Blanchard Law. And together they’re going to explain what the step-up basis is, and how utilizing it can reduce the tax burden on your heirs. Also, we’ve got a complimentary download waiting for you on this topic. If you go to gregoryricks.com/podcast92. Again, that is gregoryricks.com/podcast92.

Gregory Ricks  00:34

I’ve got a question that just came to mind. And one of the things you know that we like to protect and utilize is the step up basis on property. So that’s like, for example, stocks have a step up basis at death, meaning it steps up from the previous purchase value to the value at death. So if it was bought at 40, and is worth at death, then that person inheriting it gets that step up basis or inherits it at 80. So it’s not a taxable event. Same example, with real estate, somebody bought a property at 40 leaves it to somebody else, say assigned, and it’s valued at 80, they get that step up basis. Now, when we put real estate and such inside of a trust. And one of the things I always recommend, and we’ve talked about this so many times is there’s a death, there needs to be a appraisal of that property. If it’s land house, so forth, get an appraisal. So you can protect that step up basis and have justification of the value. The next is what if it’s in a trust? Do we still still go get those appraisals?

Wes Blanchard  01:55

Yes, to answer that question, you know, I would say this, it’s generally a good idea to get your appraisal done. However, if the plan is to sell the property, you shortly after the person’s past, well, then the market is basically going to give you the appraisal for free. Okay, so understand that that potential windfall. However, protection to that step up basis is very, very important. It’s one of those few things that, you know, I’m happy to tell people about when we’re in this succession process is to say, Look, you actually do end up with a big tax windfall, here’s how it works, you just explained it very well. And the concept applies directly to real estate the same way it does to stock. So you do get a big tax windfall, and it’s something that you absolutely need to preserve, most of the time, we are going to suggest the appraisal. However, more recently, I think, because the market has been so active and prices on homes have been so high, we have been seeing more and more of a players deciding to either sell immediately, or if it’s a surviving spouse, that person is, you know, decided to downsize can get such a good price. This, you know, we haven’t, we haven’t recently, however, been able to help some some clients and get coordinated with an appraisal, because you’re hitting the nail on the head. It’s one of the major tax benefits that you can get at this time. And you really need to be able to justify that to the IRS, when you’re telling them that I’m only reporting a gain of $5,000 on a sale where, you know, I really netted close to 200. Right. So you need to be able to justify that.

Gregory Ricks  03:42

So if a death occurs, real estate is involved, there’s going to be a step up basis, and you’re planning to sell it in the near future. So you kind of say what the market kind of takes care of that, what kind of timeframe are we talking about? That that would be reasonable.

Wes Blanchard  04:01

If your plan is to sell it within 90 to 120 days, I think that that’s a reasonable request, or you know, justification because most sales on the home, you know, if you had a an agreement to sell the home one week after, you know, your your mom or dad passed away, it is in all likelihood, it’s still going to take 45 days before your handover keys and checks. So you know, you want to be cognizant of that. But, you know, on the other side of things, you know, a 90 to 120 day window is what you would typically see in a real estate transaction prior to this market over the last two years or so. So I think that that that window is justifiable to you know, to establish the Step Up tax basis.

Gregory Ricks  04:54

So we’re going to take I believe Lee is up next from matterI How can we help you today, Lee,

Caller  05:02

I have some family trusts that I inherited when my parents died, one from my father, one from my mother, they have substantial assets in them. When I die, the trust dissolve and the the the assets go to my children. Is there a stepped up basis for them? Or do I need to move those assets out of the trust into my personal name, for them to realize the stepped up basis?

Gregory Ricks  05:30

I’m gonna go to it’s going to have to do with the structure of that trust from from that standpoint, and how how’s that going to be handled?

Caller  05:46

I have the ability to withdraw without taxes, any funds out of the trust, I only have to pay taxes on the trust income on a yearly basis. If a trust doesn’t make income, or my distributions are greater than the income, the excess distributions are tax free. So I have the ability to move all the Exxon stock out of the trust into my personal name without tax implications.

Gregory Ricks  06:16

Yeah, and without clarify, you know, my understanding is that step up basis continues, as it continues on to the next generation. And that is the neat thing about that, in that case, but it just needs to be documented along the way. And when somebody is selling that, or inheriting and selling, you know, we we kind of have to put together a history of that. And that’s why I always think it’s important that if you inherited stock, and even if it’s inside the trust, what was the value of it on the day to death? You know, what was the value of that real estate when they died? And then if it moves on to somebody else, we need that information recorded, again, and for why because sometime in the future, they’re selling it. And there was a case the other day where somebody has been holding stock forever. And and then they decided to sell the stock. And the thing is that showed a zero cost basis. Well, why did it do that? Well, they never furnished the Step Up basis of the stock. So somebody has to figure that out, or you’re going to be taxed on the whole value. And it’s fine. But what you have to worry about is when the IRS comes in and say, Hey, what’s going on here? What was what was the basis if you get audited and they want to know what that basis is? You need to have that information. It can’t just be an arbitrary number. So that’s why they weren’t readily available. Yeah, well, I think you’re good, but it’s just important that you continue that process and those that you’re leaving it to need to understand that as well. Not keep them out the loop. But hey, when I die, here’s what’s going to happen and here’s some steps you need to take because we don’t want them to pay more tax than they have to and errors can be made and things can be misunderstood. I see it happening with real estate where multiple people and we’re like we mentioned one of them. Well, you’ve got to step up banks. Oh, okay. What tell your sister and brother about it. And well, I did but they’re not interested. Okay, they’re just giving away money to Uncle Sam in that case, I I don’t quite get that.

Caller  08:45

So basically, what you’re telling me is it doesn’t matter whether the property is in the trust or in my personal name. My heirs still get the stepped up basis.

Gregory Ricks  08:56

Yeah, I’m gonna say subject to language and such there and ownership, but generally that step up basis continues. And that’s the neat thing about that, but it needs to be documented and tracked from that state of view. Okay. Thanks for the call. You know what, what assets do not get a step up basis? IRAs 401, K’s pensions, tax deferred annuities, certificates of deposit and money market accounts. So you kind of understand it’s just, you know, the easy to understand is Yeah, stocks and real estate makes that easy. From from that standpoint there and it’s something that needs to be kept up with.

Podcast Intro / Outro  09:45

Thanks so much for listening to Ask Gregory where we answer your financial questions. You can find us anywhere podcasts can be found and on YouTube and Facebook Live every Saturday from 10 to 1! Subscribe. Leave a review And tune in next time! We’d like to give a big thank you to Wes Blanchard for joining us on this episode and don’t forget we’ve got a complimentary download waiting for you on this topic if you go to gregoryricks.com/podcast92 Again that is gregoryricks.com/podcast92.

Disclosure  10:12

Gregory Ricks & Associates is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Gregory Ricks & Associates are not affiliated companies. Gregory Ricks & Associates, The Total Wealth Authority is our trademarked tagline, it does not promise or guarantee investment results or preservation of principal nor does it represent a certain level of skill. Investing involves risk, including the potential loss of principal. Any references to protection, safety or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. This radio show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Gregory Ricks & Associates is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the U.S. Government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Gregory Ricks & Associates. Any media logos and/or trademarks contained herein are the property of their respective owners and no endorsement by those owners of Gregory Ricks & Associates is stated or implied Gregory Ricks & Associates has a strategic partnership with tax professionals and attorneys who can provide tax and/or legal advice. AEWM, Gregory Ricks & Associates, WJ Blanchard Law, LLC, J Heath & Co. and Mortgage Gumbo are not affiliated companies. This show is a paid placement.