Now that we have a new presidential administration and blue majorities in the House and Senate, some legislative priorities have changed. There could be an expansion of the taxes that impact inheritances, and we will look at these potential changes in this post.

Elimination of Step-Up in Basis

At the present time, inherited appreciated assets get a stepped-up basis. To explain through the use of a simple example, let’s say that you inherit a thousand shares of stock from your uncle. He paid $20 a share a number of years before he passed away.

Your uncle paid $20,000 for the stock, and when you inherit it, the stock is selling for $100 a share. The inheritance is valued at $100,000, and he put out $20,000 for the stock, so there was an $80,000 gain.

If your uncle would have sold the stock while he was still alive, he would have been required to pay the capital gains tax on the $80,000 realized gain. You on the other hand would pay nothing, because the assets would get a stepped-up basis.

For capital gains purposes, the meter would be reset as it were, and you would only be responsible for future gains if you sell the stock. The savings would be nice under these hypothetical circumstances, but they are relatively modest all things considered.

On the other hand, if you replace your uncle with someone like Jeff Bezos or Elon Musk leaving their stock in Amazon or Tesla to their heirs, you are looking at some big digits.

President Biden never called for a separate wealth tax when he was campaigning, but he did propose the elimination of the stepped-up basis. Under his plan, the revenue would be used to support government-subsidized junior college tuition.

It is early in his administration, so we do not know how the situation will unfold as the months and years pass. If there is any news to pass along, we will share it here, so you should come back and visit us periodically to stay current.

Pending Estate Tax Exclusion Decrease

The federal estate tax carries a harsh 40 percent maximum rate, and is potentially applicable on the portion of an estate that exceeds the exclusion. If the exclusion was to be reduced, more people would be exposed to this tax, so a reduction is a big deal.

Legislative mandates can change the exclusion, and this has happened many times over the years. In 2011, the exclusion was set at $5 million as a result of a provision that was contained within the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

It was retained when another tax act was passed in 2012, and it remained in place through 2017. During that year, the exclusion was $5.49 million after a series of annual inflation adjustments.

The Tax Cuts and Jobs Act was enacted in December of 2017, and it doubled the exclusion for 2018 with yet another bump up to account for the cost of living to equal $11.18 million.

This year, the exclusion is $11.7 million, and the base that was established for 2018 will remain in place through 2025 with annual inflation adjustments. If there are no changes between now and then, in 2026, the exclusion will go back down to the 2017 level of $5.49 million adjusted for inflation.

There is a very good chance that a piece of tax legislation will be enacted between now and then, and it could accelerate the reduction. Once again, this is a fluid situation, and we will be monitoring it closely as time goes on.

Access Our Estate Planning Worksheet

If you explore this site, you will find a treasure trove of written materials that you can access to learn more about estate planning and elder law topics that impact everyone.

One of these resources is our carefully prepared worksheet. You can come away with a more thorough understanding of the process if you go through it, and it is being offered free of charge.

To get your copy, visit our worksheet access page and follow the simple instructions.

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