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Determining the basis when protecting assets

Before the American Taxpayer Relief Act of 2012, the focus of most estate planning was placed on reducing the burden imposed by the estate tax. Currently, however, only those individuals whose wealth exceeds $5.43 million have to contend with the estate tax. When seeking options for protecting assets, much of the focus is now placed on avoiding income taxes incurred when a Tennessee heir disposes of inherited property.

In determining how much income tax will be due on a sold asset, the IRS looks at the amount received from such a sale, minus the basis that the seller held in the asset. For inherited wealth, that basis consists of the fair market value of an asset as of the time of the individual's death. Any gains or losses that might be in place at that time are effectively wiped clean. As such, an heir could immediately sell an inherited asset at market value without incurring income tax.

When considering which assets are best suited for this purpose, individuals must look at how an heir plans to make use of the asset upon inheriting. In cases in which an heir is planning to sell a property in the immediate aftermath of a death, it makes sense to transfer that property within the estate. In the case of an asset that has depreciated since it was acquired, it may make more sense to gift the asset prior to death, which would give the recipient a basis equal to what was paid for the property. He or she could then sell the asset without tax penalties, as long as the sale takes place before the asset appreciates beyond the basis.  

This is an area of estate planning in which Tennessee residents must understand the larger ramifications of protecting assets from excessive taxation. While the estate tax no longer applies to most Americans, there are still other tax matters to consider. By creating a comprehensive estate plan that takes into account the future needs of one's heirs, it is possible to pass on wealth with the fewest possible reductions.

Source:, "Modern estate planning - It's all about that basis", Virginia Carter and Zachary Lamb, May 27, 2015

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