With the Biden administration in place, it is time to consider potential legislative changes that could affect your estate planning. Following we look at what some of these potential changes may be and the impact they may have.
Elimination of the Stepped-Up Cost Basis
While the impact of many of the legislative proposals are limited to high incoming earning or high net worth individuals, the elimination of the stepped-up cost basis is one with potential to impact everyone, regardless of their tax bracket.
“Cost basis” refers to the initial amount paid for an asset and is the number used to calculate capital gains tax owed on any increase in the asset’s value at the time of sale. For example, if you bought 25 shares of GameStop stock last year when it was valued at roughly $4.00 a share for a total cost of $100 and sold the same stock when it hit $347.50 a share on January 27th then you have a taxable capital gain of $8,587.50 (the difference between your $100 investment and the $8,687.50 price you sold it for).
Under the existing tax code, a non-retirement account asset’s cost basis is automatically “stepped up” to its present market value when new owners inherit it. This means if your parents paid $20,000 for their home in 1960 and it was worth $200,000 on their deaths when you inherited it, you will not owe capital gains tax if you sell the home immediately for $200,000 as the cost-basis used to measure your capital gains is the date of death value of the inherited home.
The Biden administration has proposed eliminating this provision, arguing that in a digital era it is no longer impractical to determine the original price paid for an asset. The elimination of the step up in basis for inherited assets would affect everyone who inherits property, not only high net worth individuals.
Decrease in the Federal Estate Tax Exemption
Currently, individuals with an estate valued at less than $11.7 million and couples with an estate valued at less than $23.4 million are exempt from paying federal estate tax. The maximum amount exempted from this tax could soon drop to $5 million for individuals (and $10 million for couples) or even as low as the pre-2017 tax law amount of $3.5 million for individuals (and $7 million for couples). What is more, the estate tax rate, for those estates that qualify, could increase from 40 percent to 45 percent. Naturally, those with estates valued in the millions have cause for concern.
If you are concerned about how any of these potential changes may impact your estate, an experienced estate planning attorney is the best place to turn because preparing for their potential arrival means considering your options early.
Contact Promise Law for all Your Estate Planning Needs
To get started on your estate plan or a review of an existing estate plan, contact Promise Law today at (757) 690-2470 or our website.