If you ask any accountant or business owner, calculating the cost of something is tricky and ever-changing. And when figuring out the “cost basis” for stock, one is often left scratching their head. Needless to say, cost basis is incredibly important when it comes tax time, especially if it was a bequest or gift.
If you think about it, stock represents a value that is forever changing on the basis of the market itself. Those ups and downs of the market can make it a bit difficult to calculate actual gain over the life of one individual. The wrinkle of how to count for those changing values when stock passes from the hands of that one individual to another makes the wrinkle more challenging. If you have owned stock and sold it, you probably understand that your original purchase price (your "cost basis") is compared to the ultimate sale price to determine whether you experienced a gain or loss, for tax purposes.
But what if you inherited stock? That’s where it gets tricky, as there are different rules that apply to stock you purchased yourself versus stock that you inherited from someone else. For a basic introduction to “cost basis” and the value of inherited stock, check out a recent Kiplinger column aptly titled “Cost Basis for Inherited Stock.”
Okay, now that you've read the explanation, you're probably thinking that this seems pretty straightforward, right? Well, before you start making plans for your stock holdings, you need to know that in most cases the cost basis of gifts are treated differently than bequests. While the recipients of inherited stock receive that stock at a "stepped up" basis as of the date of death transfer, gift recipients usually take the basis of the giver.
What does all of this mean? Put simply, it means that if you're trying to figure out whether to transfer stock (and some other types of property, for that matter) by gift during your lifetime or by bequest when you die, you've got to consider the different tax implications of each approach. Depending on the nature and value of the property, and the identity of your intended recipients, the difference in tax treatment may be significant.
Planning for your estate means understanding what your assets are and what their value is - to both you and your heirs. Like it or not, taxation plays a big part in determining value. So understanding the concept of cost basis, and that the way you choose to transfer your assets can significantly impact their taxation (and consequently, their value), is a big step in the right direction.
For additional information about this important topic, or for answers to your other estate planning questions, contact us at Peak Legal Group.
Reference: Kiplinger (April [edition], 2013) “Cost Basis for Inherited Stock”