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Income Tax planning is an integral part of Estate Planning. The first article in this series examined the concept of income tax basis, how it is acquired, and how it is adjusted. This article examines what happens to the income tax basis of an asset when it is gifted or bequeathed. There are different rules for the basis of an asset that is gifted than one you own at death. That seems odd, but it’s true.

Let’s look at an example. John owned 1,000 shares of a stock he purchased for $50 per share. His basis in the stock was $50 per share or $50,000. The stock skyrocketed in value to $1,000 per share, so his 1,000 shares were worth $1 million. Since John had other assets, he decided to give the shares to his daughter, Betty, and then died the next day. Betty’s basis in the stock was the same as John’s at the time of the gift. She has what’s called a “carryover” basis. Let’s say Betty sells 100 shares for $1,100 per share, or $110,000. Betty will recognize a gain of $1,100 less her basis of $50, or $1,050 per share. Her total gain is $1,050 x 100 or $105,000. She’ll be taxed depending upon her other income.

James M. Dolenga
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