There is a lot of talk in Washington about the American Families Plan that is being proposed by the Biden administration. In reality, there are parts of that plan that will not see the light of day since there is enough opposition by Republicans and moderate Democrats. But there are some that I think have headwinds. Today I want to talk about the step-up in basis proposal as this (the step-up in basis that is) something that we have talked about in the past.
IF I REMEMBER RIGHT THIS HAS TO DO WITH INHERITANCES. I HAVE HEARD THAT IF YOU RECEIVE AN INHERITANCE YOU WILL NOT OWE ANY TAXES.
- Generally true – cash, investments and real estate.
- Not true for IRAs, annuities and retirement accounts.
WHY THE DIFFERENCE IN TAX TREATMENT?
- In Wisconsin, Minnesota and many states – step up in basis. You do not get a step up for IRAs, annuities and retirement accounts.
REMIND US AGAIN WHAT IS THE STEP UP IN BASIS?
- No matter what the decedent paid for the asset – the new cost basis will be the FMV at date of death – no gain.
- Some state only get a half step-up, but generally in WI (community property) double step-up.
- Assets classified as income assets do not get step up and will be ordinary income. This is IRAs, annuities and retirement accounts that I mentioned earlier.
HOW WILL THIS CHANGE UNDER THE BIDEN PROPOSAL?
- Right now the step-up in basis is unlimited. Whether you have $10 in assets or $100 million, those assets will step-up and the person who inherits them will not pay any tax.
- Under the Biden proposal, you will still get a step-up, but only on the first one million if you are single and two million if you are married of assets owned.
WHAT HAPPENS TO THE REST?
- Any assets that do not get the basis increase, will be subject to capital gains tax by the estate. So tax will have to be paid. The beneficiary will get the advantage of the increased basis, but this increase will not be tax-free like is was in the past.
WOULD THIS TAX NEED TO BE PAID ONLY UPON DEATH?
- Good question and the answer to that is no.
- If a person gives a large gift to another person, this may also trigger the tax. This one is more complicated, but just know that there is a potential for someone to pay a capital gains tax on donated property, which was also not the case in the past.
ARE THERE ANY EXCEPTIONS?
- Yes – there is an exemption proposed for family-owned businesses. They do not need to pay any tax until the business/farm is sold to an unrelated person or it no longer operates. This makes sense because let’s say a person’s wealth is all tied up in their business, how would they pay the tax without having to sell?
Be sure to talk to a tax professional if you have any questions or would like further assistance.
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.
