In recent years, tax policy has tended to change depending on which political party held the reins in Washington, D.C. These swings mean you need to review your estate plan regularly. At a minimum, every few years. (It’s a good idea to do that regardless of tax laws, in case there are changes in your assets, beneficiaries, or other circumstances.)
Potential Change to the Step-Up in Basis
One possible change coming involves a change in rule regarding the “step-up” in tax basis. When you buy an asset, your tax basis in the item is what you paid for it. For instance, if you bought stock at $10 per share and sold it for $50 per share, you would pay capital gains tax on the difference between the sale price and your basis, or $40.
However, if you hang onto it for the rest of your life and at the time of your death your child inherits the stock when it’s worth $100 per share, they will not pay capital gains tax thanks to the step-up in basis.
The step-up in basis rule means that someone who inherits an asset has a basis equal to the fair market value as of the time of the death of the person from whom they inherited it. Instead of taking your $10 basis in the asset, your child would have a basis of $100 per share. What’s more, if they hold onto the asset and their child inherits the stock when it’s worth $200 per share, that child would take a stepped-up basis of $200 and pay no capital gains tax under the current law, even though the stock is now worth 20 times what you originally paid for it.
The operative words, “under the current law.” There has been discussion of the Biden administration of eliminating the step-up in basis.
Death Could Become a Taxable Event
Under current tax law, as long as an asset is passed down from generation to generation without being sold, it can keep increasing in value and no capital gains tax is owed on it because the owner has not realized any gain on the asset.
Another proposed change to tax law could change this by making death a taxable event. A tax could be levied on unrealized appreciation of an asset at the time of the owner’s death. The estate would be required to pay the tax just as if the deceased had sold the asset just prior to death.
Thinking about doing an end-run around this possibility by giving the asset to your child while you’re still alive? Under proposed changes to the law, the asset’s appreciation would still be subject to capital gains tax.
Possible Increase in the Capital Gains Tax Rate
Currently, long-term capital gains (those on assets held longer than a year) are taxed at a top rate of 20% depending on the income level of the seller. Under proposed changes, capital gains would be subject to the same tax rate as ordinary income for households earning more than one million dollars annually.
In addition, the top tax rate for ordinary income would increase from its current rate of 37% to 39.6%. In other words, capital gains could be taxed not only more frequently, but at almost double their current rate.
To learn more about tax proposals and changes go to TaxFoundation.org
Bob Michaels is extremely passionate about providing the best possible legal experience for his clients, and focuses his practice on elder law, estate planning, business, and real estate matters. Bob specializes in helping folks build a long-term care plan based on their circumstance. If you are considering a long-term care plan, schedule your appointment today!