By Jeremy A. Wechsler, Esq.
Your Estate Planning & Elder Planning Attorney
There has been much talk of changing tax codes in the coming months or year(s). Tax laws seem to change more often these days, which hampers tax planning for the long-term.
Currently, for your estate to be hit with federal estate tax upon death, you would have had to accumulate over $11.7 million. Biden’s team has discussed lowering that exemption to between $3.5 and $5 million, with anything above that being taxed at a rate of between 40-55%. Even at those levels, the tax wouldn’t affect most estates.
What may be more concerning for the majority of readers is the possibility that a new tax law eliminates “step-up in basis” and instead moves to “carryover basis.” If you passed away today, your heirs inherit any highly appreciated assets (stock, real estate) with a basis of the current asset value. So let’s say you bought Apple stock in 1980 for $5 and it’s now worth $500. If you sold your stock, you may have a capital gains tax due on $495 worth of the value of that asset. Same thing with your home, although there are generous capital gains exclusions for a primary residence. (Of note: Most IRA’s and qualified funds are free from capital gains.)
When you pass, your heirs will inherit your assets and start with the basis from the day you died (i.e., the basis for the Apple stock in the example above is now $500, not $5). So if the same day, your son sells the stock for $500, he pays no capital gains tax.
If the laws change and switch to carryover basis, then your son would inherit the property with your basis (i.e., the $5 instead of $500). The effect of this change would be many times more significant than a change in the federal estate tax exemption amount as described above.
I’ll keep our eye on these potential changes in the law, and provide you with any updates as I learn of them.