As administrations change, tax laws are among the most frequently reviewed changes reflecting the new policies of the President and the incoming government. At the time of this blog, it is unclear what the Biden administration may be proposing to estates, but, two possibilities are that he will propose lowering the estate tax exemption and eliminating the stepped-up basis on death. The first would affect only multi-millionaires, but the second could have an impact on more modest estates and their heirs. 

THE ESTATE TAX EXEMPTION

In 2017, Congress doubled the federal estate tax exemption and indexed it for inflation. For the 2020 tax year, the exemption was $11.58 million for individuals and $23.16 million for couples. As long as your estate is valued at under the exemption amount, it will not pay any federal estate taxes, and the vast majority of estates do not owe any tax. President Biden has expressed an interest in lowering the estate tax exemption. It could be halved to $5 million or even reduced to the previous exemption of $3.5 million for individuals.  In a state like New York, where a home can easily be worth $1,000,000., it is easy to see how more people may be subject to estate tax if these rules are changed.

THE STEP-UP IN BASIS - AN IMPORTANT PLANNING TOOL IN DANGER

The more impactful tax change may be the treatement of property values when passed at death. "Cost basis" is the monetary value of an item for tax purposes. When determining whether a capital gains tax is owed on property, the basis is used to determine whether an asset has increased or decreased in value. For example, if you purchase a stock for $10,000, that is the cost basis. If you later sell it for $50,000, you will have to pay taxes on the $40,000 increase in value. 

Under current law, and has been the case for a number of decades, when a property owner dies, the cost basis of the property is "stepped up." This means the current value of the property becomes the basis. For example, suppose you inherit a house that was purchased years ago for $50,000 and it is now worth $250,000. You will receive a step up from the original cost basis from $50,000 to $250,000. If your beneficiaries sell the property right away, they will not owe any capital gains taxes.

According to a recent article in the New York Times, the administration may propose to eliminate the basis step-up rule. In the past it was difficult to determine the original cost basis of some property, but in the digital age that information is more easily gathered. The change could result in tax increases for some people inheriting property that has risen significantly in value. 

Another question is whether either of these changes will be made retroactively. It is unlikely, but possible, that if Congress changes these rules later in the year, they could be made retroactive to the first of the year. 

If you are concerned about these rules changing, a trust may be a good way to protect your estate. Property in a trust passes outside of probate, and there are specific types of trusts that are designed to protect assets against estate taxes and capital gains. We can discuss whether a trust is right for you.

Tax experts agree that while changes to the tax code are likely, they probably won’t happen right away. The coronavirus pandemic and the recession it has triggered mean that Congress has other priorities at the moment. 

Ted Alatsas
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Brooklyn, New York Trial Attorney Practicing Family Law, Elder Law, Asset Protection and Bankruptcy Claims
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