Changes could be coming to estate tax, stepped-up basis rule
A new administration usually means that tax changes are coming. While it remains unclear exactly what estate and inheritance tax changes President Joe Biden’s administration and Congress will usher in, two possibilities are lowering the estate tax exemption and eliminating stepped-up basis at death.
The first change would affect only multi-millionaires, but the second could have an impact on more modest estates and their heirs.
In 2017, the federal estate tax exemption was doubled and indexed for inflation. For the 2021 tax year, the exemption is $11.7 million for individuals and $23.4 million for couples. As long as your estate is valued at less than the exemption amount, it will not pay any federal estate taxes.
Biden has expressed an interest in lowering the estate tax exemption, and this spring Vermont Senator Bernie Sanders introduced a bill that would cut the estate tax exemption to $3.5 million for individuals and $7 million for couples.
Under the plan, estates valued between $3.5 million and $10 million would be taxed at 45 percent, with wealthier estates taxed on an escalating scale of up to 65 percent for those over $1 billion. This would be a significant increase from the current tax rate of 40 percent for all estates over the exemption. The bill would also slash the lifetime gift tax exemption from $11.7 million to $1 million, although individuals would still be able to give away $15,000 a year without the gift counting toward the lifetime limit.
Another possible tax change is to alter how property is valued when it is passed on at death. Under current law, when a property owner dies, the “cost basis” (the monetary value for tax purposes) of the property is “stepped up” to its current value, which becomes the new cost basis. That means if you inherited property that was purchased for $10,000 but is now worth $50,000, the new cost basis would be $50,000. If you sold it right away, you would not owe any capital gains taxes.
A group of Democratic senators has introduced the Sensible Tax and Equity Promotion (STEP) Act, which would eliminate the step-up in basis at death. However, the bill would allow the first $1 million of appreciated assets to pass without taxation. In addition, families that inherit a farm or business would be able to pay the tax in installments over a 15-year period. Any taxes paid would be deductible from the estate tax.
If you are concerned about these possible changes, a trust may be a good way to protect your estate. Property in a trust passes outside of probate, and there are specific types of trusts that are designed to protect assets against estate taxes and capital gains. Talk to your attorney to determine if a trust is right for you.