They say that elections have consequences, and this is true on multiple different levels. When a new administration enters the White House, there are usually some changes to the tax laws, and they sometimes affect estate planning strategies.
There are a couple of specific provisions that are in the crosshairs, and one of them is the step-up in basis that applies to inherited appreciated assets. We will explain this scenario first, and then we will move on to the second potential change.
Capital Gains Tax Break
The best way to explain the step-up in basis is through the utilization of a stripped-down example. Let’s say that your uncle bought a thousand shares of stock many years ago at $10 a share. He paid $10,000 for the stock, and he was optimistic about the growth potential.
Your uncle was spot on, and the stock grew in value over the next 25 years. He passes away, and he leaves you the stock when it is worth $100 a share, so you are receiving a $100,000 inheritance.
The question is, would you be required to pay the capital gains tax on the $90,000 in appreciation?
Under currently existing laws, you would have no capital gains tax responsibility, because the assets would get a step-up in basis. The value would be reset to equal the value at the time of acquisition.
If you do not sell the stock immediately and it continues to grow over time, the capital gains tax would be applicable if you realize a gain beyond the $100,000 original value.
This example is based on a relatively modest amount of money, but imagine the savings for the heirs of stockholders like Amazon’s Jeff Bezos or Tesla’s Elon Musk.
Proposed Elimination of Stepped-Up Basis
During the lead up to the Democratic primaries, the candidates laid out their policy positions. A number of the aspirants were in favor of a so-called wealth tax, which would be a new tax that targeted the wealthiest people in the country.
These candidates were not successful, but there are other ways to increase the tax burden on high net worth individuals. The elimination of the stepped-up basis is one of them, and Joe Biden has expressed support for this course of action.
This would not necessarily apply to the hypothetical uncle who bought $10,000 worth of stock. It could be limited to transfers that exceed a certain amount, and the details would be fiercely negotiated.
We are not making any predictions about the outcome, but there could potentially be a change over the next few years, and we will share any updates if and when they become available.
Expiration of Record High Estate Tax Exclusion
Another change that is pending is a reduction to the federal estate tax exclusion. This is the amount that can be transferred before the tax would be levied on the remaining portion.
In 2021, the exclusion is $11.7 million, and this is a result of a provision that is contained within the Tax Cuts and Jobs Act of 2017.
This provision is going to sunset at the end of 2025. If this takes place without any new legislation passing in the meantime that alters the state of affairs, the exclusion will be significantly reduced for 2026.
It would go down to the 2017 level of $5.49 million with an inflation adjustment.
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We make an effort to provide educational opportunities to our neighbors in and around Overland Park through the workshops that we offer on an ongoing basis. You can obtain a great deal of useful information if you join us for one of these sessions, and they are offered free of charge.
The upcoming dates and all the details are posted on our workshops page. When you identify the session that works for you, follow the simple instructions to register so we can reserve your spot.
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If you are ready to take direct action to put an estate plan in place, we are here to help. You can send us a message to request a consultation appointment, and we can be reached by phone at 913-262-2000.