Retirement & Financial Planning Report

If your retired parents have options as to how they tap an investment portfolio, you might suggest they hold onto highly appreciated assets as long as possible. That could be stocks, funds, investment real estate, etc. When someone dies holding appreciated assets, the heirs generally get a “stepped-up basis” to fair market value.

Suppose Ellen Thomas bought $20,000 worth of XYZ Corp. shares many years ago. Now those shares are worth $50,000, at current prices. If Ellen sells those shares to raise $50,000 in cash for retirement spending, she’ll have a $30,000 long-term capital gain.

At a 15 percent tax rate, Ellen would owe $4,500 in tax. Instead, Ellen might raise retirement cash by selling other securities where there has been little or no appreciation. That may permit her to retain her XYZ Corp. shares until her death and leave them to her son Fred, her sole heir.

At Ellen’s death, Fred might note that the shares were worth $50,000 that day. That $50,000 becomes Fred’s basis (cost for tax purposes) in those shares. If Fred sells them for $50,000, he will owe no capital gains tax. All of the appreciation in those shares during Ellen’s lifetime will escape tax altogether.