In 2016, each individual has an estate tax exemption of $5,450,000. This amount is indexed for inflation. As a result, the federal estate tax no longer affects the vast majority of Americans.
Instead, the principal tax concern facing many married couples is the capital gains tax. Taxpayers are faced with a tax of up to 20% upon the sale of appreciated assets such as stocks or real estate. For example, let's say that you own stocks worth $200,000 that you purchased for $50,000. Your basis in those assets is your purchase price, i.e. $50,000. Upon sale of those stocks, you will owe capital gains tax of up to 20% on the appreciation of $150,000, i.e. a tax of $30,000.
However, upon death, taxpayers receive an increase in the tax basis (a”step up”) on appreciated assets that will wipe out capital gains tax for heirs. Unfortunately, married couples will not receive a full step-up in basis on assets that they own jointly. They only qualify for a one half step-up. This can result in a significant tax liability if the surviving spouse needs to sell assets to live on. And if they separate ownership of the assets to receive a full step-up, they are potentially faced with probate and the problem of guessing who will die first. However, planning can be done with trusts that will allow both the husband and wife to receive a full step-up in basis upon the death of each. This will allow the surviving spouse (and the eventual heirs) to sell inherited assets without tax concerns.