Passing wealth to the next generation can raise important questions, especially when taxes and inherited assets are involved.
At Casey Lundregan Burns, P.C., we help Massachusetts families understand estate planning considerations involving inherited property, trusts, and other assets.
The Core Concepts: Defining Step-Up in Basis
Before discussing how step-up in basis may apply, it helps to understand a few basic tax concepts.
Cost Basis and Capital Gains Explained
Cost basis generally refers to the value used to determine whether there is a gain or loss when an asset is sold. It may be affected by factors such as the original purchase price and certain adjustments related to the asset.
Capital gains generally relate to the difference between an asset’s sale price and its cost basis. For example, if an asset was purchased for $50,000 and later sold for $120,000, the difference may represent a gain that could have tax implications depending on the circumstances.
Understanding this concept helps explain why a step-up in basis can be an important consideration for inherited assets and estate planning.
The Mechanics of the Step-Up
An inherited asset gets a new basis equal to its fair market value on the owner’s date of death, or an alternate date that an executor might elect. This adjustment resets the gain calculation for the heir.
Here is a simple example. Your mother bought a home for 200,000, and it was worth 700,000 on her passing. If you inherit and later sell it for 710,000, your taxable gain is about 10,000, not 510,000, since your basis steps up to 700,000.
How Step-Up in Basis Works in Massachusetts
State property rules can affect how inherited assets are treated, particularly when property is jointly owned.
Common Law Property State Rules
Massachusetts is a common law property state. That means each spouse generally owns the portion of property titled to them, not an automatic 50-50 community interest in everything acquired during marriage.
For a home owned jointly by married spouses in Massachusetts, only the decedent’s half typically receives a step-up in basis. The surviving spouse’s half keeps its original basis, so you often end up with a blended basis after the first spouse dies.
These rules can affect planning choices for spouses who hold valuable real estate or taxable investments together.
Inheriting Massachusetts Real Estate
Many Massachusetts families own homes or other real estate that have increased in value over time. A step-up in basis may affect how potential capital gains are calculated if inherited property is later sold.
Which Assets Are Subject to a Step-Up in Basis?
Not all assets are treated the same way when they are inherited. Whether a step-up in basis applies can depend on the type of asset, how it is owned, and the circumstances involved.
Which Assets May Receive a Basis Adjustment
Many inherited assets may receive a step-up in basis based on their value at the time of the owner’s death.
- Residential real estate, including homes and vacation properties.
- Commercial real estate and rental property.
- Certain investment accounts and securities.
- Certain business interests.
- Other valuable personal property, such as collectibles.
Ineligible Assets
These assets generally do not receive a step-up in basis, and withdrawals or distributions can be taxable to the heir under normal rules.
- Cash and standard bank accounts
- Traditional IRAs
- 401(k) and 403(b) plans
- Pensions
- Annuities
Heirs take on the original owner’s tax treatment for these retirement and cash assets, following distribution and required minimum distribution rules where they apply.
Carryover Basis Versus Step-Up in Basis: Gifting vs. Bequeathing
You can transfer assets by gift while alive or by will or trust at death. The tax results differ sharply.
The Drawbacks of Gifting During Your Lifetime
Carryover basis means the recipient takes the same original cost you had. If the asset grew a lot under your watch, that gain moves to the person who got the gift.
Say you gift shares bought for 80,000 that are now worth 400,000. If your child sells later for 420,000, their taxable gain is 340,000.
Passing appreciated property at death usually avoids that result and can free heirs from a large income tax hit.
The Tax Benefits of Bequeathing Assets
If you keep appreciated assets and pass them through your will or a revocable trust, your beneficiaries receive a step-up in basis. That resets their tax starting point to value at your death.
In real terms, decades of appreciation often drop out of the income tax picture. Families then have more flexibility to sell or hold without a legacy tax bill hanging over the asset.
Married couples often ask if there is a way to refresh basis at both deaths, which leads to the double step-up idea.
Advanced Planning: The Double Step-Up in Basis
Certain trust structures can help spouses capture a basis adjustment at each death. A common tool is a QTIP trust, which fits many Massachusetts families.
Utilizing Trust Structures for Married Couples
With a QTIP trust, assets can receive a step-up when the first spouse dies, then again when the surviving spouse later passes. The trust keeps control and can protect against outside claims, while still qualifying for a second basis reset since the property is included in the survivor’s taxable estate.
If you are exploring this path, talk with counsel about titling, funding, and long-term goals. You will also want to weigh estate tax exposure at each death, since basis and estate tax move on separate tracks.
The right structure can put your family in a stronger income tax position without giving up needed access or control.
Essential Actions for Beneficiaries and Fiduciaries
Accurate values lock in the basis your family will rely on years later. A little diligence now saves headaches and disputes later.
Securing Valuations and Keeping Records
Document fair market value on the exact date of death using professional appraisals for real estate, brokerage statements for marketable securities, and business valuations where needed. Keep copies with the estate file and with the trust binder if a trust holds title.
An executor can sometimes elect an alternate valuation date six months after the passing if the estate qualifies and the overall value declines. Talk with counsel before any election, since it can affect both basis numbers and any estate tax filing.
Retitle assets promptly to the proper heir or trust, and notify custodians so cost basis gets recorded correctly in account systems.
Protect Your Family’s Wealth with Casey Lundregan Burns, P.C.
Step-up in basis can make a major difference in what your loved ones keep after inheriting real estate, investments, or business interests. But the benefit depends on timing, titling, trust design, valuations, and Massachusetts property rules.
Casey Lundregan Burns, P.C. can help you review your estate plan, protect appreciated assets, and choose strategies that fit your family.
Call 978-878-3888, or visit our contact page to discuss how smart planning can preserve more wealth for the people you care about most now.
The information provided in this blog post does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.