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General wisdom states that a person should revise their estate plan every three to five years or any time a significant life event occurs. Usually, this refers to such things as a new marriage, divorce, the birth of a child or grandchild, or anytime your assets change significantly. It can also refer to paradigm-shifting events like a global pandemic. One other instance where an estate plan revision is needed is when a new administration takes office—as has just happened. This is because new government inevitably means new federal estate tax laws and, naturally, the new administration is no exception.
What Changes Are Coming?
While there is no predicting all of the changes that may be on the horizon, two that have been explicitly signaled are as follows.
A Lower Estate Tax Exemption
Currently, if the total value of an estate is less than $11.7 million for an individual or $23.4 million for a couple, no federal estate tax needs to be paid. Under President Biden, the exemption level could drop to $5 million or even $3.5 million for individuals and $10 million or even $7 million for couples. While most of us need not worry about this adjustment, those with high-value estates are nervously holding their breath. This is because of speculation that such changes could be made retroactive to January 1, which complicates the question of how best to act now. What’s more, a lowering of the estate tax exemption is not the only, or even biggest concern. The federal estate tax rate, itself, could also change, possibly reverting to the 2001 level of 55 percent as opposed to the current 40 percent.
Elimination of the Stepped-Up Cost Basis
While the change described above will affect only the very wealthy, the elimination of the stepped-up cost basis threatens to impact almost everyone.
“Cost basis” is a number used to calculate a particular item’s value for tax purposes. It is the amount originally paid for an asset and, normally, it is this number subtracted from the asset’s current value upon which capital gains tax is due. This means that, for example, you bought ten shares of Amazon stock back in March, 2020 when each was worth $1,900 and sold them last week when share value hit $3,200, you would owe taxes on $13,000—the difference between your $19,000 initial investment (the cost basis) and the $32,000 received upon sale.
Under current legislation, the cost basis of an asset may be “stepped up” from its original sale value to its current value when the owner dies. The implication is that beneficiaries need not pay capital gains tax if they sell inherited assets immediately upon reception. One of the reasons this provision exists is that until the internet age, determining the original value of an asset was tricky. If your grandparents retained any record at all of the amount spent on purchasing their home, for instance, it was on a sheet of paper filed away somewhere and easily lost. Meanwhile, in the twenty-first century, such information is accessible at the click of a button (or tap of a touchpad). Hence, the Biden administration is talking about doing away with the step-up cost basis upon death rule.
A recent New York Times article pointed out that this change would affect everyone from Elon Musk to the most marginalized and yet there are estate planning strategies that can mitigate any potential losses.
Between the changes just outlined and the ongoing impact of Covid-19, there has never been a better time to review your current estate plan or hurry to get one set up. After all, never in most of our lifetimes have all of us been at such collective risk, and not in a long time has failing to plan carry such severe potential costs.
Contact the Estate Planning Attorneys at the Law Firm of Christopher W. Dumm