Explain the manner in which stepped-up basis rules are used in estate planning.

Question

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The Answer is The basis-or cost-of property acquired from a decedent is the fair market value of the property at the date of the decedent's death or, if elected by the personal representative, the alternative valuation date. This rule, known as the stepped-up basis rule (not available for gifting), offers an extremely valuable estate planning tool. Here is a simplified example to illustrate this point.
Several years ago Steve Stahl purchased 1,000 shares of a NASDAQ stock for $10 a share which has now appreciated to $110 a share. Assuming his marginal income tax bracket is 28 percent, if Steve were to sell the stock now he would realize an after-tax profit of $72 per share, plus the $10,000 ($10 x 1,000 shares) by way of cost recovery, or a total sum of $82,000. Assuming an estate tax rate of 35 percent, Steve's heirs will ultimately receive $53,300 (65 percent of $82,000). If, however, Steve keeps the stock until death, the stepped-up basis for that stock will be $110 per share. Estate taxes of 35 percent will consume 35 percent of the total value of $110, so the beneficiaries will receive the net amount of $71,500. Hence, the net savings on this transaction will be $18,200 ($71,500 minus $53,300).

Explain the Manner in Which Stepped-Up Basis Rules Are Used