The estate planning world is abuzz right now over President Biden’s proposed estate and capital gains tax reforms. By way of general background, the IRS imposes an estate tax on the assets you own at death. Currently, most families are exempt from paying the estate tax because the law provides for an $11.7 million estate tax exemption per person, which can be combined with a spouse for a $23.4 million exemption.
More good news is that under the current tax laws, heirs generally do not have to worry about paying capital gains taxes on pre-death unrealized gains in the assets which they inherit. This favorable result is due to a tax law which has been on the books since 1921, called the “step-up” in basis rule, which “steps-up” the cost basis of inherited assets to their date of death value. According to the congressional Joint Committee on Taxation, the “step-up” in basis rule saves taxpayers more than $40 billion a year, and allows families to freely pass appreciated assets, family heirlooms, and real estate to heirs without “socking” them with a capital gains tax on the decedent’s untaxed gains.
The estate planning world is abuzz right now because President Biden is trying to do away with these favorable estate tax laws in an attempt to reduce his perceived economic inequality amongst Americans. In a nutshell, more families would have taxable estates under Biden’s plan because he is seeking to reduce the exemption from $11.7 million per person to $3.5 million. The real kicker, however, comes from the capital gains tax reforms that would: a) eliminate the “step-up” in basis rule for pre-death capital gains in excess of $1 million, b) treat death as a sale, and c) raise the top capital gains tax rate from 20% to 39.6%. These changes would treat death as a sale and tax pre-death gains in inherited assets, which means that families over the capital gains exemption amount would find it more challenging to leave appreciated assets to heirs, especially if the children do not have the money to pay the capital gains taxes on their inherited assets. With today’s rising real estate prices, more families may find themselves in a position where they might not be able to leave a second home or investment property to their kids, at least not without making their children pay capital gains tax on their inheritance at a top rate of 39.6%.
These proposals still have to make their way through Congress, and it is uncertain how they might eventually be changed or even passed at all. What is certain, however, is that President Biden is targeting tried and true estate planning techniques in an effort to try to equalize his perceived economic opportunities among American families. This is a good time to talk to your estate planning attorney and discuss what impact these proposals might have on your estate plan.
Brian Lebensburger, Esq. is an estate planning attorney with the Miami law firm of Muller Lebensburger & Schwartz, www.mlcounsel.com. Feel free to contact Brian with any questions concerning this article at (305)670-6770 x340 or Brian@mlcounsel.com. This article does not, and is not intended to constitute legal advice and is for general purposes only. Readers should contact their attorney to obtain advice with respect to any particular matter.
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