Cost basis, tax basis. Same thing.
The person getting the item has to assign a tax or cost basis to it when they inherit it. The executor provides a basis when they turn over the property. Under current law, if I understand it correctly, if it is a gift made during the donor's lifetime, the basis the recipient gets is the basis of the donor. It is NOT stepped up. So the donor has to say to the recipient "here are 100 shares of AT&T, and your tax or cost basis is $____."
If the transfer is made at death, the basis is the amount reported on the estate tax return. Which will almost certainly be different from the value when the recipient gets it.
Simple example:
1990 Dad buys 1,000 shares of XYZ corp at $10 per share.
1995 XYZ is now worth $20 per share. Dad gives 500 shares to Sonny-boy. Sonny-boy has a basis of $10 per share, and when he sells the stock will pay capital gains tax on the difference between what he sells it for, whenever he sells it, and $10 per share.
2000 Dad dies. XYZ is now worth $30 per share, and that value is recorded on his estate tax return. His estate doesn't sell the shares, but pays tax on his gain, which would be $20 per share.
2002, the estate is finally settled, and Sonny-boy gets the other $500 shares. By now, the stock is worth $35 per share. But Sonny-boy's basis is still the $30 it was at the time Dad died. So if he turns around and sells the stock the day he gets it, he's going to pay capital gains tax on $5 per share (the $35 current value minus the $30 estate tax basis).
Now, what's the difference if Dad's estate passes the stock through with the $10 basis, and Sonny-boy pays all the tax when he sells the stock? The difference is that the tax is deferred, that's all.
And there's no more recordkeeping reqired anywhere. Dad's estate has to know his tax basis in the stock in order to pay the estate tax. So that's not a new number to get. Sonny boy gets one basis value from the estate, which will almost certainly NOT be the value the day he actually receives the property.
No more record keeping for anybody. Just different record keeping. |
