Among the many changes in tax law to go into effect in 2010 was the change in cost basis for inherited assets. Previously, all inherited assets were “stepped-up” from their original value at date of purchase to their fair market value at date of death. In this way, if inherited assets were sold shortly after death, litttle or no capital gains tax was owed. However, in 2010 inherited assets do not receive this automatic “step-up”; instead they will be valued at the lesser of the decedent’s basis or the fair market value as of date of death. The result is that for decedents dying in 2010, the decedent’s tax basis and the fair market value as of date of death will have to be determined for every asset. As you can imagine, this will cause paperwork nightmares for heirs.
What we suggest is making a list of your assets and their values and tax basis information now, while you are still alive and your memory is fresh. This is not a list that has to be shared with anybody until after your death, but the mere existence of your list of assets will save your family and heirs hours of headaches (and heartache) later on.
If the thought of taking the time and energy to sort through files and records to gather this information makes you want to run for the hills, imagine how your heirs will feel! To ease the burden, try making your list one asset at a time, over the course of many days. However you choose to create your list, you can be sure your heirs will thank you.
(Note: There is some cushion to this harsh new rule: There is an exemption amount of $1.3 million of gain from this carry-over basis rule, and another $3 million exemption applying to assets inherited from a spouse. Any excess, however, will be subject to to the new carry-over basis rule. The duty to allocate this exemption among assets going to different persons will be that of your executor or successor trustee. Choose that person wisely. )