How the Step-Up in Basis Can Maximize Your Charitable Giving
As you stay informed about ongoing discussions around potential tax reform, one principle that continues to attract attention is the “step-up in basis.” While recent legislative proposals may or may not alter this principle, understanding its significance is crucial for your estate and charitable planning. The step-up in basis can profoundly influence how your assets are transferred, taxed, and ultimately, how your legacy supports your favorite causes.
At Greater Houston Community Foundation (Foundation), we are committed to helping donors like you navigate these complex issues. Our experienced team can work closely with you and your financial advisors to craft personalized estate plans that maximize your philanthropic impact while being tax-efficient. We provide tailored charitable giving strategies and guidance on how to structure your estate to preserve your philanthropic legacy, even as laws and regulations evolve. Whether you’re considering establishing a bequest, setting up a donor advised fund, or exploring other charitable giving options, we’re here to support your vision every step of the way.
What Is the Step-Up in Basis?
The “step-up in basis” is a fundamental tax concept that adjusts the value of an inherited asset to its fair market value at the time of the owner’s death. This means that any capital gains accrued during the owner’s lifetime are effectively erased for tax purposes. For example, if you purchased stock at $10 per share and it’s worth $50 at your death, your heirs will have a new basis of $50, and any subsequent gains are taxed only if they sell the stock.
This principle can significantly reduce capital gains taxes for heirs, making it an essential consideration in estate planning and charitable giving strategies. It influences decisions about which assets to leave to heirs versus which to designate for charitable purposes.
Why Does the Step-Up in Basis Matter for Donors?
The implications become particularly impactful when considering the types of assets you leave behind and how they benefit your heirs and charitable beneficiaries. Let’s explore two scenarios that highlight how the Foundation and a donor advised fund (DAF) can play a pivotal role in maximizing your legacy and tax efficiency:
Scenario 1: IRA to Children, Stock to Charity
Suppose you name your children as beneficiaries of your IRA. After your passing, your children will typically owe income tax on distributions from the IRA, based on their ordinary income tax rates. Meanwhile, if you leave appreciated stock to the Foundation through your will or trust, that asset benefits from a step-up in basis.
The outcome: Your children face a significant tax burden on inherited IRA distributions, while the Foundation receives assets that are not taxed at all. Although this strategy benefits your heirs in some ways, the tax inefficiency of leaving the IRA directly to them can diminish the overall value of your estate.
Scenario 2: IRA to Charity, Stock to Children
Alternatively, consider naming the Foundation as the beneficiary of your IRA, while leaving appreciated stock to your children. In this case:
- The Foundation receives the IRA without income tax, maximizing the amount available for your intended charitable purpose.
- Your children inherit the appreciated stock with a step-up in basis, allowing them to sell it without incurring capital gains taxes on the appreciation.
The outcome: This approach amplifies your estate’s impact—supporting your community while providing your heirs with more tax-efficient assets. Your children benefit from the step-up in basis on appreciated stock, and your charitable gift is amplified through the tax advantages of passing through the Foundation, a tax-exempt organization.
Why This Matters Now—and Moving Forward
While recent legislative proposals have not yet eliminated the step-up in basis, changes to this principle could affect how you plan your estate and charitable giving in the future. By proactively understanding and leveraging current laws, you can ensure your legacy continues to support your community effectively while optimizing tax efficiency.
Greater Houston Community Foundation is here to assist you in crafting an estate plan that balances your philanthropic goals with tax considerations, ultimately preserving your legacy. We welcome the opportunity to work with you and your financial advisors to:
- Develop strategies that maximize the impact of your charitable gifts
- Explore the benefits of naming the Foundation as the beneficiary of assets like IRAs
- Ensure your legacy aligns with both your values and current tax laws
Your generosity has the power to transform lives. Let’s make sure it’s protected and amplified through thoughtful, informed planning.
Reach out to Kevin Pickett or Andrea Mayes to learn more about how you can create a legacy that supports your charitable passions while making smart estate planning choices. Together, we can help you turn your generosity into a powerful force for good—today and for generations to come.
More Helpful Articles by Greater Houston Community Foundation:
- How to Donate Shares of Privately Held Companies
- What Is the Great Wealth Transfer?
- DAFs & Private Foundations: Addressing Common Misconceptions
- How to Start a Scholarship Fund
- The Team Approach to Philanthropy
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