A family from Queens recently came to my office. Their parents had passed away, leaving the family home they’d purchased in 1982 for about $70,000. Today, the property is worth nearly $1.5 million. The parents never created a trust, so their entire estate—including the house—is now under the supervision of the Surrogate’s Court. The children were worried about the probate process, but their primary fear was the massive tax bill they assumed was coming when they sold the house.
Most people view probate as a slow, expensive, and public process to be avoided. They are generally right. In my practice, we design estate plans that, for many families, bypass probate entirely through the deliberate use of trusts. However, when probate is unavoidable, it’s my job to see it through efficiently. In doing so, we often find a significant, if unintentional, tax advantage that can save heirs a substantial amount of money.
The “Step-Up in Basis” and Capital Gains
The tax benefit from probate comes from a federal concept known as the “step-up in basis.” It directly addresses the capital gains tax that would otherwise be due on a highly appreciated asset.
Let’s return to that family from Queens. If their parents had simply gifted them the house a year before they passed, the children would have inherited their parents’ original cost basis—the $70,000 purchase price. If they then sold the house for $1.5 million, they would face capital gains tax on the difference: a staggering $1,430,000. This is a common and costly mistake I see people make trying to avoid probate without proper counsel.
Because the house is instead passing to them through the estate, the tax law works differently. The asset receives a step-up in basis to its fair market value on the date of the parent’s death. In this case, the “cost” of the house is no longer considered $70,000. It is “stepped up” to $1.5 million. When the children sell the property for $1.5 million, their taxable gain is zero. The step-up effectively erases more than four decades of appreciation for tax purposes.
This principle applies to other assets as well, such as stocks or brokerage accounts. A stock portfolio that grew from $100,000 to $1 million would also receive a stepped-up basis, potentially saving hundreds of thousands of dollars in capital gains tax for the beneficiaries.
Deducting the Costs of Administration
A secondary, more modest tax benefit involves the expenses incurred during the probate process itself. Administering an estate is not free. There are court filing fees, appraisal costs, legal fees, and the executor’s commission. These costs can be deducted, though the estate must choose where to take them.
They can be used to reduce the value of the estate for estate tax purposes on Form 706. However, with the federal estate tax exemption at $13.61 million per person in 2024 and the New York State exemption at $6.94 million, the vast majority of estates owe no estate tax. For these estates, the deduction is more valuable on the estate’s income tax return, Form 1041. It can offset any income the estate earns during the administration period—such as interest, dividends, or rent from a property—before the assets are distributed.
In New York, the executor’s commission is not an arbitrary number. It is a fee paid to the fiduciary for their work in managing the estate, and it is set by state law. Surrogate’s Court Procedure Act (SCPA) §2307 provides a clear formula based on a percentage of the estate’s value. This statutory commission, along with our firm’s legal fees, becomes a legitimate deduction for the estate.
A Consequence, Not a Strategy
I must be clear: no one should actively choose probate just to gain these tax benefits. The step-up in basis is a powerful tool, but it is not unique to probate. Assets passed via a properly drafted Revocable or Irrevocable Trust also receive a step-up in basis at death. Planning with trusts allows you to achieve the same tax benefit while also avoiding the costs, delays, and public record of a court proceeding.
Think of these tax rules as a silver lining in a situation dictated by a lack of prior planning. Stewardship is about being intentional. The most prudent course of action is to create a deliberate plan that ensures your assets pass to your loved ones efficiently and privately. But if you find yourself managing an estate that must go through probate, understanding these tax implications is a critical part of your fiduciary duty.
If you are an executor for an estate in probate, your first step is to marshal the assets and understand the tax obligations. For a review of your specific duties as a fiduciary under New York law, schedule a consultation with our office.
