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Should You Be Concerned About Changes to the Step-up in Basis? | SB Estate Planning and Elder Law

Posted by Julianna Malis | Sep 17, 2021 | 0 Comments

Whenever a new president takes office, “discussions” about taxes are sure to follow. During his campaign, President Biden proposed a number of changes to the tax code that would affect wealthy Americans. One proposal, however, could impact people of more modest means: modifications to, or the elimination of, the basis step-up rule. Call (805)946-1550 if you think this proposed change might affect you.

What do we mean by step-up in basis? Basis, in this case, refers to the value of an inherited asset for tax purposes. One could use the value of the asset when it was originally purchased, or one could use the value of the asset when the original owner passed away and the asset was bequeathed to a beneficiary. The latter value could be considerably higher than the original purchase price.

A step-up in basis uses the higher value, the “stepped-up” value. Assessing the value of an inherited asset in this way translates into lower capital gains tax liability. Let's look at a hypothetical example.

Say an investor purchased 1000 shares of stock at five dollars a share, meaning the investment was originally worth $5,000. Over time, the value of the stock increased to 25 dollars per share and the original investment was now worth $25,000, a gain of $20,000. When the investor passed away, she left that stock to her son. Without a step-up in basis, the son could be responsible for paying capital gains tax on that $20,000 increase in value. However, with a step-up in basis, any capital gains tax would be based on the stepped-up value of $25,000. If the son sold the stock at the same price he inherited it, he would not have to pay capital gains tax on the $20,000 increase in the value.

The step-up in basis also applies to other appreciated assets, such as a house. Let's say a property that originally cost $200,000 was worth $400,000 when the original purchaser passed away. If the house was left to the purchaser's daughter, the step-up in basis would mean the daughter doesn't have to pay capital gains tax on the $200,000 increase in value (from $200,000 to $400,000). Instead, the value of the property would be “stepped up” to $400,000 for tax purposes.

You can see how the step-up in basis can dramatically lower one's capital gains tax liability. Eliminating it could have serious financial consequences for the beneficiaries of appreciated assets. If this concerns you, please make an appointment at (805)946-1550.

It is important to note that the elimination of the step-up in basis, or even a modification of it, is by no means a certainty. According to the Tax Policy Center, efforts to eliminate the step-up in basis were made in 1976, 2001, and 2015. And while several senators have announced a bill designed to put an end to the step-up in basis, the passage of such a bill could prove difficult in an evenly divided senate. President Biden's latest proposal would eliminate the step-up in basis to gains over $1 million, with protections for farms and family-owned businesses given to heirs.

For now, it's all talk. Fortunately, with proper planning, it is possible to protect your assets, inherited or otherwise, against changes to the tax code. You can schedule a consultation with us at Santa Barbara Estate Planning and Elder Law using the number (805)946-1550. 

About the Author

Julianna Malis

Julianna Malis, Attorney at Law, LL.M (Taxation-Estate Planning) Julianna helps families stop worrying about the ‘what ifs’ in life, and instead prepare for life events through proper estate planning. As the founder of Santa Barbara Estate Planning Law Group, she brings a family-centered approach to planning, with a focus on practical solutions for families and high net worth individuals...

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