Q: Tax Playa, my grandmother recently died and left me 100 shares of Coca-Cola stock (Ticker Symbol:KO). She bought the shares in 1950 for $1000. When she died, they were worth $1,000,000. I sold the shares for that amount a few days after the funeral. What kind of taxes will I owe?
Bob from New Jersey
A: First of all, the rules I'm about to describe are for ordinary property only. There are different rules for tax-advantaged property like IRAs, life insurance, and annuities. However, you may be able to benefit from the so-called "step-up in basis" rules
The step-up in basis rules is one of the best tax advantages in the entire code. It says that the basis of property received by an inheritor is usually equal to the fair market value of the property at the date of the decedent's death (or lower if the cost basis of the decedent was lower than fair market value at death).
That means that when you sold your shares of KO, your basis in the sale was $1,000,000. Your sales price was $1,000,000. This gives you a capital gain of $0. You owe no tax.
If there was not a step-up in basis, your basis in the sale would have only been $1000, and you would have owed about $150,000 in capital gains taxes. Now you see why the step-up in basis is so important.
It isn't just the financial windfall that makes the step-up in basis so lucrative. Can you imagine trying to re-establish basis for (in your grandmother's case) 56 years of dividend re-investments, splits, etc? It would be a nightmare. The step-up in basis helps ease a nightmarish record-keeping burden.
My mom passed away in Washington State and the Estate in under 100,000, so my sister did a small estate affidavit and there are 38,000 in stocks to be equally split between the 4 children. An Attorney told me we need to go through Probate to get a Estate Tax I.D. number as this is what the Investmet Company requires.
The Investment Co. said they need a Estate Tax I.D. Number. Does it have to go through Probate to get this Estate Tax I.D. Number?
Is there an other way we can get it with out Probate?
Thanks,
Debra.
Posted by: Debra | 2007.09.25 at 05:01 PM
Step-up in Basis.
If a testator devises real property to an irrevocable trust in his will, does the trust get the step-up in basis?
tku
Posted by: MJSweeney | 2008.04.21 at 11:20 AM