Death and Taxes

Not long ago there was a 40% federal estate and gift tax and a 15% capital gains tax. The thinking at the time was that it was better for individuals to cash in their assets, pay the capital gains tax, and give away the money to their children. Now, the calculation is completely different because federal estate tax starts at $5.34 million ($10.68 million for a married couple), so that 99.8% of all estates will pay no estate tax whatsoever. The aim is not just to avoid estate tax but capital gains tax as well, and this is where the stepped-up basis for capital gains comes in.
If you have a portfolio with an investment cost or basis of $1 million that is now worth $3 million, upon your death, your children receive a capital gains tax basis of $3 million. This means that in this scenario your children would receive the $3 million investment portfolio free of federal estate tax and free of capital gains tax up to $3 million. While Benjamin Franklin’s quip about death and taxes still being the only certainty remains largely true, estate tax and capital gains tax has been vastly minimized in the past few years and will likely stay that way for years to come.