When designing an estate plan in Florida, one critical decision many individuals face is how to transfer property to their loved ones. Two common methods are inheritance through a will or trust and the use of a deed or gift during your lifetime. While both options ensure that your property reaches the intended beneficiaries, there are significant tax benefits to consider—particularly when it comes to the “stepped-up basis” for inherited property. Understanding this concept could potentially save your heirs thousands of dollars in capital gains taxes.
What is the Stepped-Up Basis?
The stepped-up basis refers to an adjustment made to the tax basis of an inherited property. When someone inherits real estate, its tax basis—the value used to calculate capital gains—is “stepped up” to the property’s fair market value (FMV) on the date of the decedent’s death.
In contrast, if a property is transferred via a deed during the owner’s lifetime, such as a deathbed deed, the original basis (what the owner originally paid for the property) remains intact. This means that any appreciation in value from the time of purchase to the date of transfer may be subject to capital gains taxes when the beneficiary sells the property.
Example 1: Inheritance Through a Will or Trust (with Stepped-Up Basis)
Imagine you purchased a beachfront property in Clearwater 30 years ago for $100,000. Over the years, the property appreciated in value, and at the time of your passing, it is worth $500,000.
If your heirs inherit the property through a will or trust, they receive the property with a stepped-up basis. This means their tax basis is adjusted to the property’s current market value—$500,000. Should they decide to sell the property soon after inheriting it for $500,000, they will not owe any capital gains taxes because their basis and the selling price are the same.
On the other hand, if they hold onto the property and it appreciates to $600,000, they would only owe capital gains taxes on the $100,000 increase in value (from $500,000 to $600,000).
Example 2: Deathbed Deed (No Stepped-Up Basis)
Now, let’s say instead of passing the property through a will or trust, you decide to execute a deathbed deed. The property is still worth $500,000 at the time of transfer, but since it was given during your lifetime, the original basis remains—$100,000.
When your heirs inherit the property through a deathbed deed, their tax basis is not stepped up. If they sell the property for $500,000, they will owe capital gains taxes on the $400,000 difference between the original basis ($100,000) and the sale price ($500,000). This could mean a significant tax burden for your loved ones.
Why the Stepped-Up Basis is a Game-Changer
The stepped-up basis can result in substantial tax savings for your beneficiaries. When a property is passed through inheritance, they essentially get a “clean slate” when it comes to the property’s tax basis. This allows them to sell the property without incurring large capital gains taxes on decades of appreciation.
In contrast, a deathbed deed transfers the property with the original tax basis intact. If the property has appreciated significantly in value since it was purchased, the capital gains tax owed can be considerable.
Additional Considerations
While the tax benefits of inheritance with a stepped-up basis are compelling, it’s important to remember that estate planning is not one-size-fits-all. A deathbed deed might be the right option in certain circumstances, especially if avoiding probate is a priority for you. Enhanced life estate deeds also allow you to retain control over the property during your lifetime, which can be appealing for many Floridians.
However, if maximizing the value of your assets for your heirs is a primary concern, passing property through inheritance, and taking advantage of the stepped-up basis, is often the smarter move.
Considering your Estate Plan? Give us a Call we Would Love to Help you
Our firm exists to help families plan their Estates. Every family’s situation is unique, and Florida’s estate laws can be complex. When planning your estate, it’s important to consider both probate and tax implications carefully. Consulting with a Florida estate planning attorney can help you design a plan that balances your goals, preserves your wealth, and minimizes the tax burden for your heirs.
At Zoecklein Law, we specialize in helping families across Florida navigate the nuances of estate planning, ensuring that your assets are protected and your legacy is preserved for future generations.
If you’re ready to explore the best strategy for your estate, contact us today for a personalized consultation.
-Brice Zoecklein, Esq.
813-501-5071
Disclaimer: The information contained in this blog/website is for informational purposes only and provides general information about the law but not specific advice. This information should not be used as a substitute for advice from competent legal counsel as laws change and the facts in your specific case need to be analyzed.
