How Will Eliminating the Step-up in Basis on Inherited Property Affect Estate Planning?
The Great Transfer of Wealth is coming. That’s the transition of money from Baby Boomers and Generation X parents to their Millennial children. In fact, by 2030, Millennials are expected to inherit some $68 trillion from their parents. With Joe Biden’s proposed changes to eliminate the step-up in basis on inherited property, the government could be taking a sizable chunk of that through taxes. But there are things you can do now to ensure your heirs receive more of what you leave behind.
Understanding the Step-up in Basis
A step-up in basis readjusts the original value of an asset. In simple terms, if you bought a home for $50,000 30 years ago and leave it to your children when you die, they will only have to pay capital gains tax on the value of the home at the time of the inheritance. If the home has appreciated to $300,000, and they choose to sell for $300,000 (or keep the home), they essentially eliminate the tax. When they eventually sell, they’ll only have to pay taxes on the difference between the value at the time of the sale and the value of the home when you died.
The step-up in basis has long been considered a loophole in the tax law. While you might think it’s just for the wealthy, the precedent has helped small-business owners as well. Imagine you have invested wisely throughout your life and put all of your assets in a trust for your children, you are protecting them from having to pay potentially millions in taxes when you die. Or what if you launched a business from scratch and grew it to $20 million? The step-up in basis has helped generations receive assets without having to pay Uncle Sam exorbitant taxes.
Biden’s Plan to Eliminate Step-up in Basis
Presidential hopeful Joe Biden has proposed to eliminate the step-up in basis if he is elected. As with any change, there are positives and negatives to his initiative. On the positive side, repealing the step-up in basis inherited property tax loophole will:
· increase federal revenue, which Biden has suggested will go toward making healthcare more affordable and accessible to the general public
On the other side are the negatives, including:
· an increase in compliance costs for heirs who will have to document the original cost of every capital gain
· IRS auditing costs could increase since they’ll have to do the accounting and auditing on all assets passed down at death to determine the original prices
What to Do Now to Protect Inherited Property
No matter who is elected this November, you should be taking measures now to protect your assets. Biden has proposed significant tax changes. It’s important to speak to your estate planning professional now to take advantage of not only the current tax laws but the record-high gift and estate tax exception amounts. The Tax Cuts and Jobs Act provides a tax exemption of gifts up to $11.58 million, allowing recipients to avoid the 40% estate and gift tax. If you want to leave significant assets to your heirs, this could be a viable option.