Why is "Stepped-Up" Basis Important for South Dakota Agricultural Producers?

The importance of "stepped-up" basis for South Dakota agricultural producers cannot be overemphasized. To illustrate this point, consider the following scenario.

In 2003, a farmer in Charles Mix County makes a $100,000 investment in a piece of farm land. In 2015, the farmer's property is worth $2 million. The farmer has a favorite grandson and wants to give him the property as a gift. However, the farmer also has a knowledgeable estate planning attorney whose advice is, rather than gifting the farm land now, wait until the farmer's death. 

The next year the farmer dies and the grandson inherits the property. Under this scenario, step-up in basis rules would apply (i.e. property that transfers at death is "stepped-up" to the fair market value at the date of death). Therefore, upon the farmer's death, the basis of his property is stepped up from $100,000 to $2 million. The result is that the grandson (as the beneficiary) can now liquidate that property at its stepped-up basis of $2 million with no capital gains liability.

On the other hand, if the farmer disregarded his attorney’s advice and gifted the property to his nephew in 2015, "carry-over" basis rules (transfer of basis during life) would have applied. In other words, if the property would have been gifted from the farmer to his grandson, then the grandson “carries over” the basis of the farmer. In these circumstances, the grandson would "carry over" the farmer's basis of $100,000 and when the grandson sells the property, the grandson would be responsible for paying capital gains on the asset now worth $2 million.

Brooke Swier Schloss
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Family Law and Estate Planning attorney helping families across South Dakota plan and protect their loved ones