Fong Law Group

Biden Administration May Spell Changes to Estate Tax and Stepped-Up Basis Rule

A new administration usually means that tax code changes are coming. While it remains unclear exactly what tax changes President Biden’s administration will usher in, two possibilities are that it will propose lowering the estate tax exemption and eliminating the stepped-up basis on death. The first would affect only multi-millionaires, but the second could have an impact on more modest estates and their heirs. 

In 2017, Republicans in Congress and President Trump doubled the federal estate tax exemption and indexed it for inflation. For the 2021 tax year, the exemption is $11.7 million for individuals and $23.4 million for couples. As long as your estate is valued at under the exemption amount, it will not pay any federal estate taxes, and the vast majority of estates do not owe any tax. President Biden has expressed an interest in lowering the estate tax exemption. It could be more than halved to $5 million or even reduced to the previous exemption of $3.5 million for individuals. 

Another possible tax change is to how property is valued when it is passed on at death. "Cost basis" is the monetary value of an item for tax purposes. When determining whether a capital gains tax is owed on property, the basis is used to determine whether an asset has increased or decreased in value. For example, if you purchase a stock for $10,000, that is the cost basis. If you later sell it for $50,000, you will have to pay taxes on the $40,000 increase in value. 

Under current law, when a property owner dies, the cost basis of the property is "stepped up." This means the current value of the property becomes the basis. For example, suppose you inherit a house that was purchased years ago for $50,000 and it is now worth $250,000. You will receive a step up from the original cost basis from $50,000 to $250,000. If you sell the property right away, you will not owe any capital gains taxes.

According to an article in the New York Times, the current administration may propose to eliminate the basis step-up rule. In the past it was difficult to determine the original cost basis of some property, but in the digital age that information is more easily gathered. The change could result in tax increases for some people inheriting property that has risen significantly in value. 

Another question is whether either of these changes will be made retroactively. It is unlikely, but possible, that if Congress changes these rules later in the year, they could be made retroactive to the first of the year. 

If you are concerned about these rules changing, a trust may be a good way to protect your estate. Property in a trust passes outside of probate, and there are specific types of trusts that are designed to protect assets against estate taxes and capital gains. Talk to your attorney to determine if a trust is right for you. 

Tax experts agree that while changes to the tax code are likely, they probably won’t happen right away. The coronavirus pandemic and the recession it has triggered mean that Congress has other priorities at the moment. 

Grand Tour Collectibles

Wealthy Americans used to go on tours of Europe and collect replicas of the places they visited. Those and other valuable collectibles need to be handled carefully in estate plans.

If you travel to any major tourist destination today, you can purchase any number of trinkets that replicate the major landmarks such as Paris and purchase a mass-produced miniature Eiffel Tower.

Because they are so easily available, these items are not worth very much. However, when it was common for wealthy people to go on grand tours of Europe cheap replicas were not so easily available.  Therefore, people often purchased detailed hand-crafted replicas of the landmarks they visited that were often made out of glass, brass or marble. Those replicas are very valuable today.

One couple has amassed a collection of them. It consists of approximately 4,500 pieces, as Barron's reports in "Taxing Collectibles: What You Need to Know."

For estate planning purposes, valuable collectibles like those replicas can create challenges. The value of any collection can be taxed, if it is part of the estate for estate tax purposes. As a result, it is important to plan around any potential problems.

There are several things that can be done. For example, if no one in the family wants to inherit them, they can be donated to charity for a tax benefit. Keeping them in the family to take advantage of the higher estate tax exemption is also possible. You might also consider creating a separate pass through entity to hold them. 

The new tax rule eliminated tax-free like-kind exchanges for artwork and other collectibles.  If you have art work and other collectibles and if you want to know how the new tax rules under the Trump era affect them, you should consult an estate planning attorney.

Reference: Barron's (March 25, 2017) "Taxing Collectibles: What You Need to Know."