There can always be legislative changes that impact estate planning matters so we keep our finger on the pulse of these issues. This dynamic is especially relevant when there is a transition from one party to the other in the White House.
With this in mind, we are going to explain a potential change to the capital gains tax structure, and we will look at another tax issue that is looming over the horizon.
Inherited Appreciated Assets
Let’s say that your grandfather bought a thousand shares of stock way back in the day when it was going for $20 a share. He paid $20,000, and when he passes away, he leaves it to you when is worth $200 a share.
The stock appreciated by $180,000 while it was in his possession. If he had sold the stock while he was alive, he would have been required to the pay capital gains tax on the appreciation.
However, you would not have any tax responsibility because you would get a step-up in basis. The value for tax purposes would be reset, and you would pay no capital gains tax if you immediately sell the stock.
If you hang onto the stock and realize a gain later when it is worth more than $200,000, the appreciation would be subject to the capital gains tax.
Proposed Elimination of Stepped-Up Basis
During the scramble for the Democratic presidential nomination, some of the candidates proposed a wealth tax that would target the highest net worth individuals in the country.
These aspirants did not get the nod, and Joe Biden never called for a wealth tax per se. However, he did state a policy position that would impose an additional tax on generational wealth without creating a new form of taxation.
He has proposed an elimination of the step-up in basis, and according to his plan, the funds would be used to finance free junior college tuition for American students.
Many observers believe this notion will never come to fruition, but it is a very relevant issue that we will keep an eye on going forward.
Sunset of Record High Exclusion
The estate tax exclusion is the amount that can be transferred tax-free before the tax would be levied on the remainder.
In December of 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act was enacted, and it went into effect the following year. It established a $5 million estate tax exclusion, and it was retained when a subsequent tax act was passed in 2012.
At the end of 2017, the Tax Cuts and Jobs Act was enacted, and included an increase in the exclusion to $11.18 million for 2018. Since that time, there have been annual inflation adjustments, and during the 2021 current calendar year, the exclusion is $11.7 million.
This provision is going to sunset on the last day of 2025, and the exclusion will go back down to the 2017 level in 2026. The exclusion was $5.49 million then, but it would be adjusted for inflation.
There may be a new tax law passed in the meantime, and Biden has stated that he would like to see the exclusion go back down to “traditional levels.” This is another fluid situation that we will monitor as time goes on.
Schedule a Consultation Today!
Clearly, there are a lot of things to think about when you are planning your estate, and circumstances are always subject to change. We can gain an understanding of your situation and help you devise a custom crafted plan that is ideal for you and your family.
If you already have a plan that has not been reviewed in years, we can go over it with you and make any revisions that may be necessary.
You can schedule a consultation with our attorney in Charlotte, North Carolina or Huntersville, North Carolina if you give us a call at 704-944-3245. The number in Ashland, Kentucky is 606-324-5516, and the number in Florence, Kentucky is 859-372-6655. There is also a contact form on this site you can use if you would prefer to send us a message.
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