Articles for Financial Advisors

ATRA Benefits Estate Planning

ATRA Benefits Estate Planning

ATRA was signed into law in early 2013. This legislation makes permanent a number of estate planning provisions that had a “sunset provision.” Thus, under ATRA, the maximum estate, gift and GST tax rate is 40%, the 2013 lifetime estate and tax exemption is $5.25 million per person (indexed for inflation), and “portability” for married couples remains.


The portability provision means what one spouse does not use can be used by the surviving spouse. For example, Mr. Smith died in 2013 without using any one his lifetime exemption. Mrs. Smith now has her $5.25 million exemption and her deceased spouse’s $5.25 million exemption. Suppose Mrs. Smith died in 2014 (after inheriting her husband’s assets) with a taxable estate of $10 million. At the time of her death, Mrs. Smith had not used any of her lifetime exclusion. Her estate would not have any federal estate tax liability because her lifetime exclusion is greater than $10.5 million (due to 2013 CPI adjustment for 2014 estates).


Step Up in Basis


Another permanent provision covered by ATRA is a stepped up basis. This is another plus for your clients. For example, Tom bought 1,000 shares of Apple for $20 a share many years ago. When Tom died in early 2014, the 1,000 shares were worth $500,000 (vs. a $20,000 purchase price). Whoever inherits the 1,000 shares will enjoy a $500,000 cost basis. Any sale by the beneficiary means that any gain or loss will be based on a “purchase price” of $500,000 (not $20,000 Tom paid). Moreover, even if the beneficiary sells the 1,000 Apple shares a day after Tom dies, any gain or loss is long term. Suppose beneficiary sells the 1,000 shares a week after Tom dies for $485,000. The beneficiary will have a long-term capital loss of $15,000 (and no taxable gain).


Not every asset enjoys a step up in basis when owner dies. Assets such as CDs, annuities, IRAs and qualified retirement accounts never receive a step up in basis for income tax purposes.



Benefits of Dying for Heirs

§  Beneficiary gets a 100% step up in basis with most assets

§  Subsequent sale by beneficiary is automatically long term

§  Step up and long term status regardless of how long beneficiary owns asset

§  Step up and long term status regardless of how long decedent owned asset


For example, Amy owned the following assets when she died:


[1] IRA worth $100,000  ($30,000 of before-tax contributions + $70,000 growth)

[2] Annuity worth $200,000 ($80,000 of after-tax contributions)

[3] Mutual fund worth $300,000 ($45,000 investment grew to $300,000)

[4] Stock bought 2 days before death for $900, worth $1,500 on date of death



Amy’s sole heir is her friend, Betty. A week after Amy dies Betty sells everything and receives 4 different checks. Here are Betty’s taxable gains:


[1] IRA sold for $101,000 ($1K appreciation after Amy’s death):

100% taxed as ordinary income ($101K taxable)

[2] Annuity sold for $202,000 ($2K appreciation after Amy’s death):

$122,000 taxed as ordinary income ($202K - $80K cost basis)

[3] Mutual fund sold for $300,000:

$0 taxable ($300,000 received by Betty income tax free)

[4] Stock sold for $1,500:

$0 taxable ($1,500 received by Betty income tax free)


Despite some headlines that infer ATRA caused some kind of upheaval, making previous estate tax provisions permanent is a good think. Higher exemptions mean less need for complex estate planning.

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