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capet's avatar

Benefit from stepped-up basis by having my parents buy stock for me?

Asked by capet (876points) March 18th, 2021
7 responses
“Great Question” (1points)

In the US, I believe that the following is true: If you die and leave stock to your heirs, you avoid some of the capital gains tax (and so do they).

If that’s true, then could I avoid some capital gains tax by doing the following?
1. I give my parents money.
2. My parents buy stock.
3. My parents give me the stock when they die.

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Tropical_Willie's avatar

Get a tax lawyer and don’t ask on a random inter-web site what to do with your money.

It could go the ASPCA or homeless shelter if their will is not directed to you.

elbanditoroso's avatar

Do you trust your parents not to abscond with your money?

Unless you have something in writing, how will, you, the IRS, or anyone else be able to prove that stock XYZ was purchased with your funds? Answer: they won’t.

I’m not sure I would worry about capital gains for a stock bought today that you may not possess for 40 years. Chances are that the stock and the company will be worthless.

LuckyGuy's avatar

I am not a tax attorney or CPA. But, sadly,I have gone through this a couple of with elderly parents and in-laws.

The stock’s basis is the value on the date of death. It seems that your method would work and be extremely profitable if you gave your parents cash to buy it while at a low value and then years later it later multiplied in value many times..

You are taking a few risks here. Since the stock is in your parent’s name it will be considered part of their estate. If they are hospitalized and need to be in a nursing home it can be taken to pay for expenses.
Make sure you know how your parent’s will it written. The entire estate might be going to Aunt Tillie, not you.
The purchase might happen within a short time of death and appear to be a fraud case.
Your parent might forget how that you paid for it and use it for a trip to Bermuda.

I’m sure there is a long list.

Love_my_doggie's avatar

Yes, you have an understanding of how the stepped-up basis rules work. But, do you really want to use another person’s eventual death as the basis of your financial planning strategy?

capet's avatar

@Love_my_doggie Haha good point! I actually don’t feel that bad about using my parents’ death in my financial plans, it’s bound to happen eventually.

However, there is another reason that I would never actually do this: I live a very comfortable life, I don’t really believe in the stepped-up basis loophole, and I would rather leave that money to charity (or to Uncle Sam) rather than my parents.

Love_my_doggie's avatar

Stepped-up basis isn’t a “loophole;” it’s an extremely valuable provision that allows the orderly and rational transition of property upon death.

Let’s say that someone inherits his late mother’s house. She bought it decades ago, perhaps during the 1970s or 1980s, but there’s no paperwork for the purchase. There are also no records of the addition she built, the roof replacement, the new HVAC system, the trees she’d planted, or other improvements.

So, when her son sells the property, how does he establish her cost basis? He can’t.
Instead, the date-of-death value wipes the slate clean and gives him a reliable and defensible number.

BTW, it doesn’t matter whether you “believe in” federal tax law. When your parents do pass away, their assets will get a stepped-up basis, whether real or personal property.

capet's avatar

@Love_my_doggie coming with the fire! I love it. Never lose that.

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