• Ronald A. Flate

Step-up in basis at death might go away

Dear Clients and Friends,

In late March, a coalition of Senate Democrats introduced the Sensible Taxation and Equity Promotion (STEP) Act. The act would get rid of what’s known as the step-up in basis to tax the unrealized gains of certain estates at death.

Step-up in basis refers to the way the value of an asset is readjusted for tax purposes upon inheritance. Under current rules, assets pass to heirs at the current market price, not the owner’s original cost. That means no capital gains are realized, and no taxes are due.

Under the STEP Act plan, up to $1 million in unrealized capital gains would be excluded from the tax. For example, let’s say you expect to leave your children $5 million in stocks you purchased for $3 million. Under STEP, $1 million of the $2 million increase in value would be subject to capital gains.

The same rules would apply to gifts, with capital gains realized on the date of the gift. The law would also eliminate the use of trusts as a tool to avoid the tax.

Currently, estates valued above $11.2 million may be subject to a 40% estate tax upon inheritance. The STEP Act is written such that those estates are not subject to double taxation, because any tax paid under STEP would be deductible for estate tax purposes.

In addition to the $1 million capital gains exemption, there would be an additional exclusion of up to $500,000 for personal residences. Assets in retirement accounts would continue to be exempt.

Critics say the bill would be a severe blow to family farms and other businesses that transfer to the next generation. But advocates argue that heirs who intend to continue operating those assets will have 15 years to pay the tax.

As drafted, the tax would be retroactive to January 1, 2021 if the measure is enacted.

We continue to invite your calls for a free phone evaluation on any of your estate planning or probate questions.

Best, Ron

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