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Good Assets and Bad Assets for Heirs

Massachusetts residents involved in creating an estate plan may be interested to learn that taxes are levied on varying assets in different ways. According to a recent article, some types of assets should be held in the estate until death because their tax basis will be stepped-up when they pass to heirs, allowing them to avoid certain amounts of capital gains taxation.

For example, if a person purchased stock in Apple Computer for $100 and later sold the stock for $1000, the basis would be $100 and the taxable gain would be $900. If, however, the person died and ownership of the stock passed to an heir, the heir’s basis would be adjusted to the $1000 market value. If the heir then sold the stock for $1000, there would be no taxable gain on the sale. Thus, for highly appreciated stock, it is often a good idea to keep it in the estate and arrange for its transfer in an estate plan rather than selling it prior to death. Depreciated securities, on the other hand, should often be sold in order to claim the capital loss deduction. This deduction may be lost when it is transferred to an heir after the benefactors death.

Generally, it is wise to hold depleted partnerships, collectibles, appreciated stock and Roth IRAs. On the other side are taxable IRAs, bonds, cash and depreciated stock, on which heirs may pay significant taxes or may not be able to claim losses.

The specific circumstances of an estate may call for variations away from these general guidelines. An examination of assets by an estate planning attorney and the creation of an estate plan may allow for peace of mind and maximum benefit to heirs. The use of certain planning instruments may allow for the transfer of assets outside of probate, for example, and some tax obligations may be avoided with planning.

Source: Forbes, “Estate Planning: A Ranking of Good Assets and Bad Assets“, William Baldwin, August 25, 2014

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