What does Biden want to change with regards to inheritance taxes?
Normally, what happens when someone passes away and all the assets that person owns are above a certain dollar threshold the estate pays tax on that before it gets passed on to the heirs.
Repealing step-up basis would mean that the heirs would have to pay taxes on any gains that were unrealized passed on by the prior owner.
What would repealing step up in basis mean?
If someone dies and they had accumulated real estate stocks, a business, or any amount of wealth that is over a certain dollar amount, the estate is going to have to pay tax. Right now, that amount for the estate tax is $11.7 million per person. So in the case that someone died today with $11 million of assets, the heirs can inherit it with no estate tax. That limit is set to sunset back to $5 million per person in 2025. At the moment, the inheritance tax is at 40% and there are also talks about increasing the tax rates to 45% or even having a tiered structure that gets up to 65% inheritance tax on estates over a billion dollars.
What is the stepped-up basis?
The other side of the equation when it comes to inheritance tax is what’s called step up. So if someone dies today and they had $5,000,000 and this amount is all held up in an apartment building that was bought 20 years ago, the apartment was initially valued at $1,000,000 at the time it was initially purchased. If the person was to pass on the apartment to heirs, they would inherit a step-up basis. So their basis in that property would be $5,000,000 which is the fair market value when the person died and that theoretically means that they could turn around the next day and sell that property for $5,000,000 and not pay any federal or state taxes on that.
Biden aims to end step-up in basis benefit for estates
There’s a proposed tax law now to eliminate that step up in value. So in the above example, the heirs would inherit the property on the deceased’s basis. So in the case, the heirs wanted to sell the property, they would have to pay tax on the gain on the property. This elimination of the step-up has been proposed before and has been struck down because it’s very complex to try and track that especially in a multi-generational situation where the property moves from one person in one generation to another.
What should you do in light of the proposed changes?
An increase in capital gains or inheritance tax and the complete elimination of the step-up basis will capture billions in taxes to fund the U.S budget and this is most likely going to hurt the rich the most. Now is the time to plan and re-look inherited investment and speak to your estate advisor or accountant on tax planning and how to make the most of the situation with a solid estate plan.
