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The role that basis plays in asset protection

Prior to the passage of the American Taxpayer Relief Act of 2012, the primary focus of most estate planning was the avoidance of the estate tax, which could reach as high as 47 percent of the value of inherited assets. Now, however, only those New Jersey residents who have an estate valued at more than $5.43 million will be affected by the estate tax. For everyone else, the focus on asset protection often turns toward reducing the income tax burden placed upon heirs. The way that the IRS calculates that tax depends on the basis that is held by the individual who inherits and then sells a property.

Consider, for example, an individual who wishes to pass on a house to a loved one. If the heir plans to live in the home for a significant period of time after inheriting, his or her needs are different than if that property is to be sold soon after it is inherited. This is because an heir receives a basis in inherited property that is equal to the fair market value of the property at the time of inheritance.

If an inherited home is sold at market value, an heir would not be subject to income tax on that sale. However, if he or she lives in the home and the property appreciates over time, the owner would eventually be subjected to income tax based on the difference between the basis and the sale price. Basis is calculated differently for property that is gifted during the giver's lifetime, and it is equal to the price that the giver paid for the property. In this way, a property that has decreased in value may be better suited as a gift than an inheritance, as the recipient could live in the home while the value rises to equal the basis.

As seen in this example, the intention of a New Jersey heir and the basis of a piece of property are important when considering asset protection options. This fact underscores the need to sit down with one's intended heirs and discuss the way that an inheritance might be used. With the right degree of planning, it is possible to pass on assets without incurring heavy taxation, which can make a great deal of difference to those left behind. 

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

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