On April 28, 2021, the Biden administration proposed eliminating stepped-up basis on gains for many taxpayers when stocks, real estate, and other capital assets are passed down to heirs. The proposal would change the current law which provides that the basis of inherited assets is reset (either up or down) to the present fair market value of the asset as of the date of the decedent’s death. This effectively eliminates beneficiaries from paying capital gains taxes on assets upon inheritance when the asset is sold or not.
Under the Biden Administration’s proposal, the step-up in basis would no longer apply to gains over $1 million (or $2.5 million per couple when combined with real estate exemptions that exist under current law). It is unclear whether the proposal would create deemed sales at death. The reform would (i) not apply to transfers to charity, and (ii) would provide protections to family-owned businesses and farms, exempting them from the payment of taxes when given to heirs who plan to continue to run the business or farm.
On March 29, 2021, Senate Democrats proposed the Sensible Taxation and Equity Promotion (STEP) Act of 2021 and House Democrats introduced H.R. 2286. Both bills aim to eliminate the step-up in basis and create deemed sales at death or when gifts are made. One major difference in the two congressional proposals is that the STEP Act would apply retroactively to gifts made and estates of decedents who died after December 31, 2020, whereas H.R. 2286 would apply to those after December 31, 2021.
The STEP Act also provides an exclusion from tax of $100,000 for gifts and of up to $1 million for transfers at death (reduced by any exclusion used for gifts) for unrealized capital gains. The capital gains tax applicable to illiquid assets such as farms or businesses could be paid in installments over fifteen years. In addition, the current exclusions of up to $250,000 for individuals and $500,000 for spouses filing jointly for personal residences and assets held in retirement accounts would still apply under the STEP Act. Gifts and bequests made to charitable organizations would be exempt from capital gains tax as well. Income tax paid pursuant to the STEP Act would be deductible for estate tax purposes, partially mitigating the effect of the estate tax. Nongrantor trusts would be required to pay tax on capital gains every 21 years, with trusts created in 2005 or earlier having their first “deemed realization” in 2026.
One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation. Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.