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HOW DAVID KOCH’S HEIRS WILL RECEIVE MOST OF HIS ESTATE AND HOW YOURS CAN TOO

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By Lane V. Erickson, Idaho Estate Planning Attorney

Billionaire David Koch died last week. He was just under the age of 18 years old. It is estimated that his estate is worth $50 billion. Some experts have estimated that David Koch’s heirs will likely receive the bulk of his estate because most of his estate was tied up in real estate, businesses, and other investments that are subject to capital gains. However, these capital gains taxes will likely be avoided by what is known as the step-up in basis.

This leads me to a meeting that I once had with a client who had received a diagnosis that she wouldn’t live much longer. Even though she wasn’t a billionaire like David Koch, and her estate was modest, she was concerned about what would happen to her property, including her home, after she died. Her main concern was that she wanted to pass her assets and estate on to her children.

She asked me if it would be better for her to sell her home before she passed away. This led us to a discussion she had had with her accountant about capital gains taxes and how to avoid them through the step-up in basis laws. In the end, I agreed with her accountant that it would be best to not sell her home, and simply allow her home to be transferred to her children through her estate. I explained to her, as did her accounted, that by transferring her home this way, her children would receive a step-up in basis and would not have to pay any capital gains taxes if any existed.

To summarize, step-up in basis is a specific tax provision that allows capital gains that have not yet been realized to disappear. If the original owner were to sell this item their basis would be what they paid for the item in the first place. If the item has appreciated in value the capital gains tax would apply to the amount of appreciation since the date of purchase. However, with a step-up in basis is used, the value of the item at the time that it is past is considered the new basis. An example will help illustrate how this works.

Suppose you purchased a home 50 years ago for $10,000. This is your basis in the home. Now, 50 years later, the home is worth $200,000. If you were to sell the home, capital gains tax would apply to $190,000 of appreciation, which is the amount in value the home has risen above your basis. However, if rather than selling your home, you pass your home to your children through your estate after you pass away, your children will receive a step-up in basis. This means that their basis is not the original $10,000 that it was when you purchased the home, but rather is now the $200,000 which is the current value in the home. In other words, the basis “steps up” from $10,000 to $200,000. If your children sell the home immediately, there is no capital gains tax. If on the other hand your children keep the home for several decades, and it again appreciates in value, the capital gains tax that will apply to them will be the amount of appreciation in the home above their basis which is $200,000.

What’s this concept is understood, it does help individuals when it comes to their estate planning. It gives them the ability to decide whether they want to deal with capital gains taxes while they are alive, or simply use their estate planning to pass their property on to their children after they pass away so that a step-up in basis can occur.

ENLIST AN IDAHO ESTATE PLANNING ATTORNEY TO HELP YOU

If you have any questions about your estate or how to simplify your plans for your family and loved ones, we can help.  Call us toll free at 877-232-6101 or 208-232-6101 for a free consultation with Lane Erickson and the Racine Olson team of Estate Planning attorneys in Idaho. You can also email Lane Erickson directly at lane@racineolson.com. We will answer your questions and will help you solve your Idaho Estate Planning problems. I have helped numerous clients create their own customized estate plans and I’m confident that I can help you too.

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