owner of an asset dies, in most cases the cost or basis of the asset for income
tax purposes is increased to its fair market value. When the asset is later sold, there is no
capital gain on the amount of the step up.
Stated differently, capital gain is only assessed on the appreciation
occurring after the owner's death.
as real estate and businesses need to be appraised by an appraiser to
substantiate the date of death value, but it does not follow that a
appraisal is always better. In many estate plans, assets are divided
revocable and irrevocable trusts when one spouse dies. One purpose of
this is to protect the first-spouse-to-die's estate tax exemption (the
amount the first-spouse-to-die can
give away without estate tax).
the first-spouse-to-die's exemption is protected by placing that portion into
an irrevocable trust as to which the Surviving Spouse receives lifetime use
subject to duties of the children not to waste it. In 2009 the exemption is $3,500,000 (although
the exemption equivalent is unlimited in 2010 and is scheduled to go down to
$1,000,000 in 2011, it is hoped that Congress will enact and the President will
sign legislation bumping the exemption up to $3,500,000 or more for 2011 and
thereafter). If the estate consists of one piece of real
estate and if appraiser A says it is worth $7,000,000 and appraiser B says it
is worth $14,000,000, which appraisal is "better"? For income tax (capital gain) purposes,
stepping up the basis to $14,000,000 is better than stepping up the basis to
$7,000,000. But for estate tax purposes, the $7,000,000 appraisal will shield
50% of the property from estate taxes while the $14,000,000 appraisal will only
It is never
good to shop for an unrealistically high or low appraisal, but the above
illustration shows that what is good for income tax purposes may not be good
for estate tax purposes. When appraising
a fractional interest in real estate or a business, a discount for minority and
marketability can be taken. This
discount lowers the date of death value.
What if a
high range appraisal and no discount were taken at the first spouse's death, to
maximize the step up, on the ground that there is no estate tax until the
second spouse's death? At the second
spouse's death, when there is an estate tax and when a low value appraisal plus
discount appraisals may be critical, the IRS may argue that the failure to take
discounts at the first spouse's death precludes discounts at the second
spouse's death. The IRS may also point to the first death appraisal as evidence
to discredit and increase the second death appraisal.
Spiro is a Beverly Hills attorney who is a certified specialist in
Taxation and in Estate Planning, Probate and Trust Law. He holds a Masters
Degree in Taxation from Golden Gate University and has taught tax and estate
planning courses at UCLA and USC. He has been named as Super Lawyer by
Los Angeles Magazine.
Access Randy Spiro's
Martindale-Hubbell profile on www.martindale.com