One of the complexities of estate planning is that the rules of the game are always changing. Right now we’re in the middle of the presidential election between Trump and Biden, and whoever wins is definitely going to have an impact on your wallet for years to come. What makes this election all the more stressful is the fact that due to the logistical complications surrounding mail in voting, the country may not know the actual results for quite some time until after voting day. While Trump hasn’t said much regarding future tax policy changes that he’d like to enact, if Biden is elected you will probably want to make some changes to your estate plan before year end.
Reduction Estate Tax Exemption
Biden has stated that he would like to toss out Trump’s Tax Cuts and Jobs Act (TCJA). Repealing the TCJA would cut the current the estate tax gift exemption of $22.36 million for married couples in half down to $11.18 million. Anything beyond this exemption amount would be taxed at 40% upon death. While some people say that a $11.18 million exemption is plenty large, consider that not all assets which are taxed at death are liquid; that’s because the estate tax is essentially a tax on the total wealth an individual owned. It’s quite possible that even a business may need to be liquidated if the proper planning precautions are not made; an example of this would be an owner of a sports team. Recently on American Dreams, our interview guest was Joe McNulty, a CPA who specializes in sports franchises. He explained that when the owner of a sports team dies, unless the team was purchased as a family partnership, the combined estate taxes at the federal and state levels could amount to hundreds of millions of dollars. If you don’t have that kind of liquid cash in your estate, you’ll either need to set up a payment plan with the IRS, or outright sell the team.
Capital Gains & Step Up Basis
Biden has also indicated that he’d like to tax long term capital gains as ordinary income as well as remove the step up basis rule. Depending on your income level, long term capital gains can be taxed as high as 20% which can be significantly lower that your normal tax bracket. A removal of preferential tax treatment for long term capital gains would mean that your gains would be taxed at the same rate as ordinary income. If you’re in the highest income tax rate bracket, that would be 37%, however Biden has also indicated he’d like to change that to 39.6% If you currently have long term assets that you are planning on selling in the near future you may want to sell them before year end in order to take advantage of the preferential long term capital gains rates.
What is basis and what on earth is a step-up basis? Simply put, when you purchase an asset, basis is the amount of money that you spent to purchase it. When that asset is sold, the amount of money that was used to purchase the asset is excluded from being taxed. Under current law, when an individual inherits assets, the basis of the assets is changed from the original owner’s basis to the fair market value at the time of death. This change in basis can enable those who inherit the assets to sell them immediately, free of tax. A repeal of the step-up basis rule would mean that any assets sold by heirs could not be subject to huge taxable gains. One strategy to counter the removal of a stepped-up basis is to begin making gifts of your appreciated assets to long term trusts. If the assets are in a long-term trust, the trustee could then control the timing of the sale after death in order to minimize tax.
If you have any questions regarding estate and tax planning or family office, advice (we never sell investments), please consider contacting us here at Info@GROCO.com. Or, visit our website at www.GROCO.com to learn more about us. Unfortunately, we no longer give advice to other tax professionals gratis.