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Tuesday, September 23, 2014

Happy-Cola Savings

Billy and Bonnie are working on keeping taxes to a minimum for their family when they inherit Billy and Bonnie’s leftover money and property after their deaths. 

‘Stepped up basis’ means that if Billy and Bonnie’s son, Junior, sells his inherited shares of Happy-Cola stock Billy purchased around the 1950s after Billy’s death, Junior will save capital gains tax. 

In last week’s column, we calculated what Billy would have to pay at least $20,000 in federal and Illinois capital gains taxes if he sold his Happy-Cola holding, because he invested only $1,000 buying his shares in 1952.  They have been an amazing investment.  They are now worth $101,000. 

The $100,000 difference between Billy’s purchase price (his investment or ‘basis’ in the stock) and his sale price is Billy’s profit or ‘capital gain.’ 

But let’s suppose that Billy died today and had left the stock to his son, Junior.  Junior’s investment in the stock would be considered to be whatever the fair market value of the stock was at the date of Billy’s death.  So $101,000 would be Junior’s so-called “stepped up” basis. 

Thus, when Junior sells the stock, he should save at least $20,000 in capital gains tax – and potentially piles of paperwork. 

For advice about “using death” to possibly reduce taxes for your family, call us for an estate planning appointment at (815) 436-1996.

©2014 Gruber Law Office, Ltd.


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