Income tax

Estate planning income tax: what is the basis?

Avoidance of estate taxes is a consideration in estate planning.

Under current law, however, inheritance tax issues generally only affect the wealthiest 1% of the population, but everyone should be aware of income tax issues, especially basis when making estate planning decisions.

Due to changes in tax laws over the past decade, estate plans and trusts set up under previous legislation may no longer effectively address these income and tax base issues.

Years ago, when the tax laws were less friendly, if a middle-class couple was looking for an estate planning attorney, one of the first topics of discussion would have been an estate plan to avoid estate taxes. Estate tax was a priority because a couple with assets over $1,500,000.00 could have found part of their estate subject to federal estate tax at a rate between 45-47% . With such an estate tax rate of over $1,500,000.00, it made sense to focus carefully on estate taxes in the planning process.

Fast forward to today and planning to avoid property taxes is now much less important for most people. Under current law, the federal estate tax exemption is $10,000,000 per taxpayer, indexed to inflation. This means that in 2022, each person can transfer $12,060,000 before the estate tax kicks in, and a married couple can house double that amount. With this high estate tax exemption, planning to avoid estate taxes has simply become unnecessary for the vast majority of Americans.

The favorable evolution of inheritance tax laws does not mean, however, that tax planning should be ignored in the estate planning process. Instead, new tax laws have shifted the focus from estate tax planning to income tax planning, and more specifically to “baseline” planning. Skip the basic planning and you or your heirs could be in for a nasty surprise when you dispose of an asset.

The Basics of the Basics

“Basis” is an important income tax concept used to determine the amount of taxable income resulting from the disposal (eg, sale) of an asset. The amount of taxable income you “realize” is equal to the difference between the value you receive for the asset minus your base in the asset.

In general, your base in a particular asset will be determined by one of three rules, depending on how you acquire the asset:

Assets purchased: For assets you acquire by purchase, your basis for each asset is your investment in that asset, usually the amount you paid for the asset when purchased. This is the origin of the term “cost basis” often used to refer to the basis of a purchased asset.


For assets you acquire by gift, your base in the donated property is generally equal to the donor’s base in the property. Conceptually, the donor base is considered a transfer to you, and this is the origin of the term “carry-over base” often used to refer to the base of an asset received as a gift.

Legacy assets

For assets you inherit, your base in the inherited property is generally reset to the fair market value of the property on the date of the person’s death. Any unrealized gain or loss existing at the death of the person is effectively wiped out. Therefore, you could sell the property immediately after inheriting it without any tax consequences.

The base adjustment for inherited assets is commonly referred to as a “rolling base”, but it is important to recognize that under these rules a “shrinking base” could occur if the asset declines in value during the period when the person from whom you inherited the asset owned the asset.

The greater the difference between the amount you receive when you dispose of an asset and your base in the asset, the greater the taxable income you will realize on the disposition. Thus, effective estate planning should seek to maximize your base and that of your heirs in an asset prior to the date you plan to sell the property.

Planning Considerations

Analysis of individual assets

Basic planning requires you to look at each asset individually. You need to consider the expected future appreciation of each asset as well as the expected timing for the disposal of the asset. Also be aware that the tax rates imposed on the income realized on the sale of an asset may vary depending on the type of asset. Similarly, the rules for determining your basis or that of your heirs in a property may also vary depending on the type of property. For these reasons, there is no simple rule of thumb that can be applied uniformly to everyone or every asset when it comes to basic planning. Instead, your personal circumstances should be reviewed on an asset-by-asset basis.

Lifetime donations of depreciated assets

If you own an asset that has depreciated in value since you bought it and you don’t plan to sell it during your lifetime, you may consider donating the asset while you are alive to maintain a higher base. . Donating the asset while you are alive will allow the recipient to take your base in the asset, and if the asset appreciates later, the recipient could sell it and use your base in calculating taxable income.

On the other hand, if you hold the assets until your death and the beneficiary receives the assets from your estate, the beneficiary base will be limited to the fair market value of the assets at the time of your death. If the asset subsequently appreciates and is sold, the beneficiary’s taxable income will be higher than if you had given the asset to them while you were alive.

Hold valued property until death

If you own an asset that has appreciated in value since you purchased it, you might consider holding the asset until your death so that your heirs receive a new “bolstered base” of the asset to your death. This “enhanced base” will allow your heirs to sell the property immediately without incurring tax on the sale proceeds.

On the other hand, if you sell the asset during your lifetime or give it to someone who will sell it later, you or the recipient of the gift will earn taxable income.

If you hold property until you die, your heirs should consider whether or not to obtain an appraisal of the property (other than cash or securities). The appraisal will document the fair market value of the asset at the time of your death and if the asset is subsequently sold, possibly years later, the appraisal will substantiate your heirs’ basis in the asset.

Reassess assets held in trust

Married couples usually have an estate plan that provides that upon the death of the first spouse, a trust is established for the surviving spouse.

These trusts, commonly referred to as “credit shelter trusts” or “family trusts”, are often structured so that when the surviving spouse subsequently dies, the assets of the trust are not included in the taxable estate of the surviving spouse. . Under previous law, when the amount of estate tax exemption was relatively small, these types of trusts often offered significant estate tax savings.

However, under current law where estate tax affects less than 1% of the U.S. population, these trusts often have no impact on estate taxes and instead create the negative consequence of increasing the income tax on trusts and their beneficiaries.

This negative tax consequence arises because the assets of the trust are not included in the taxable estate of the surviving spouse. Thus, the base of the inheritance is not revalorized (that is to say “reinforced”) with the death of the surviving spouse. Essentially, these trusts prevent the ability to avoid income tax on the capital gain that occurs between the first death and the death of the surviving spouse.

The impact of these trusts on the income base and tax should prompt any couple who had estate plans prepared under prior law to reassess those plans to ensure they avoid any tax issues. on income. If you are already a beneficiary of a credit shelter trust or a family trust, you should consider discussing with your advisor whether such a trust is properly structured for tax efficiency, and if not, what the possibilities are. available to you to remedy the situation.


Estate planning is an art that requires adjustments over time. In light of changes in tax laws, the focus of tax planning for most individuals has shifted from estate tax to income tax. Anyone with an estate plan prepared under prior law or any beneficiary of a trust established under prior law will be well served by reassessing whether those plans and trusts are still tax efficient.

© 2022 Ward and Smith, Pennsylvania. All rights reserved.National Law Review, Volume XII, Number 203