“Death taxes” generally refer to estate taxes. Estate taxes are any taxes applied to the transfer of a person’s assets at death.

Taxable assets include personal property such as a house, cars, furniture or musical instruments; business assets like land, equipment and inventory; and investments like stocks, bonds and real estate.

President Barack Obama proposed a change to estate tax policy in his January State of the Union address that was aimed at removing the step-up in basis at death provision. The proposed change would affect a lot of families and family-owned businesses, including many in Santa Barbara, Ventura and San Luis Obispo counties.

So what is the step-up basis and what is its purpose? The step-up at death basis works like this:


With a step-up in basis, the value of the asset is determined to be the (higher) market value of the asset at the time of a benefactor’s death, not the value at which the asset was originally purchased. Here’s a simple example:

A man buys a house for $20,000 (the original purchase value). He later bequeaths the house to his daughter. When he dies, the fair-market value (FMV) of the house is $220,000. The daughter decides to sell, and sells the house for FMV. Under current law, the daughter gets the step-up in basis. There is no capital gains tax on the house when it’s sold, because her basis is the FMV of the house at the time of her father’s death, which is exactly what she sold the house for.

The purpose of the step-up in basis provision is to prevent another layer of taxation from occurring on inherited assets. So, in the example above, without the step-up in basis, the taxable capital gain would be the difference between the original purchase value of the house and the sales value when it was sold, or $200,000.

The White House estimates that the proposed estate tax policy change would result in an additional $200 billion in new federal tax revenues over the next 10 years. Although $200 billion is a big number, its estimate isn’t hard to believe.

— This article was written by the Tax & Business Law Teams at Rogers, Sheffield & Campbell LLP of Santa Barbara. Click here to read previous columns. The opinions expressed are their own. This article is not intended to provide legal advice. For legal advice on any of the information in this post, click here for the form or phone number on the Rogers, Sheffield & Campbell Contact Us page.