Stock is simply not a “normal” asset. Consequently, the tax treatment can get pretty far from normal, too. Against this backdrop, a little education on the subject can go a long ways.
If you have just inherited stock or if you are planning to leave stock behind to your heirs, then it is well worth your time to get the skinny on the how taxes impact stock in the context of wealth transfer planning.
There are literally volumes to read on the topic of inherited stock, but thankfully Kiplinger posted a handy little note and Q&A on the topic last month with “The Tax Hit on Inherited Stock.”
Essentially, stock is a partial ownership of something greater (a company) and the value of the stock is based on the company which is based on market which is based on when you buy and sell or how long you own the stock and/or who held the stock at each juncture.
In other words, there are more than a few variables and these variables are what can make for a big tax headache.
The tax code settles this complexity with a simple(r) equation of sale price - basis = taxable amount. “Basis” is the value of the stock when the present owner acquired the stock. Hence, basis will thereafter determine what (if any) capital gains tax is due upon the stock sale by the present owner.
This also is the operative concept once appreciated stock is inherited.
Stock basis will be measured and reset again at the juncture it is inherited. Unpack that: a parent buys stock for $500 in 1990 andis valued at $30,000 when the parent dies in 2014. Thereafter, the heirs inherit the stock and their basis is the $30,000 date of death value. Accordingly, a sale by the heirs down the line at $32,000 means that only that last $2,000 is taxable.
Again there is much more to be said and not all stock or stock taxation is so easy. And then again, not everyone inherits stock by bequest and the rules change. When thinking about saving the inheritance from taxation it is not just the estate tax or the gift tax you have to consider, and it is not just the settlor of the estate who pays them.
Set up your assets inefficiently and your heirs can get stuck with a tax bill you did not even think about (or even know about). So think about stocks and think about the capital gains tax, and, more importantly, plan for them.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: Kiplinger (May 1, 2014) “The Tax Hit on Inherited Stock”