How a Change in Tax Laws Can Affect Your Estate Plan

Calculator with the word Taxes

There haven’t been any changes…yet.

However, there are two proposals on the horizon receiving a lot of attention.

Here’s a quick review:

Lowering the Estate Tax Exemption

Currently, you are only subject to the estate tax if your net worth exceeds $11.7 million dollars (the “estate tax exemption”).

President Biden’s campaign proposed to lower the estate tax exemption to $3.5 million dollars per person.

While a $3.5 million dollar exemption amount is still a high number for most people, the calculation of “net worth” for estate tax purposes includes the value of IRA’s, 401k’s, homes and other real property, brokerage accounts, bank accounts, and life insurance on a person’s life. This number can add up quickly!

Change in the Capital Gains Rules at Death: A Loss of the Step-Up in Basis?

Currently, at a person’s death, their heirs receive most of the appreciated estate assets with a “step-up” in basis at death. Understanding the “step-up” in basis rule, first requires an understanding of the term “basis” as well as the capital gains tax rules. “Basis” is the amount of the original purchase of an asset – for example, if I originally purchase a share of stock at $10, my basis in that share of stock is $10. As for the capital gains tax rules, if I were to later sell that share of stock during my life for $100 per share, for example, I would owe capital gains tax on the difference between the sales price ($100) and my basis ($10).

Current laws “step-up” the basis of an asset to “fair market value” at the owner’s death. For example, if I die owning that appreciated share of stock, and if the fair market value of the stock share was $100 on the date of my death, then my heirs’ share of stock will have a “stepped-up” basis of $100. If my heirs then sold that share of stock after my death for $100, there would be no capital gains tax owed. Holding on to appreciated assets until death has been a great way to avoid income taxes for many families.

However, there is a lot of talk under the new administration about eliminating the “step-up” in basis, which would trigger capital gains tax to be owed on appreciated assets after the death of the owner. There will probably be an exemption amount to be applied to the tax owed (one legislative bill has proposed a $1 million dollar exemption before income tax is owed), but we will have to wait and see.

So, what’s the takeaway?

We are watching key legislation daily, and future newsletters will cover any changes.

For now, make sure that you have planned for flexibility in your estate plan and keep in contact with your attorneys and financial advisors.

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