Estate Planning & Living Trusts
24. Stepped-up basis example
Another problem with giving away assets is that you might be giving the recipient a tax problem.
Here's an example. Let's say Bob bought his home back in 1955 for $20,000 and today it's worth $250,000. He gives it to his son Tom, who then sells it for $250,000.
Because Bob transferred title to Tom while he was living, the house keeps Bob's old cost basis of $20,000. Remember, that's what he paid for it.
That means Tom now has a $230,000 gain on the sale. And, under current tax law, he will have to pay $34,500 in capital gains tax.
Let's look at what happens if Bob had left his home to Tom as an inheritance -- either through a will or a trust.