Estate planners hope to dodge bullet on inherited assets

Death and taxes go hand in hand for estate planners in California, but the expectations of their returns took a nosedive over the summer with the administration’s proposal to fund the Build Back Better Act by taxing unrealized capital gains on estates. Fortunately, lawmakers have so far left untouched these provisions that Congress made federal tax law in 2017, which were themselves changes to previous law.

This is not the last word on the subject. The estate and gift tax exclusion under current law does have a sunset provision of January 1, 2026. And, Congress has been known to slip in last-minute provisions that members sometimes don’t catch, or that they approve with the momentum that is part of coming together to create new law.

Keeping up with changes to current tax law is essential for estate planners in San Jose who are looking ahead to ensure that they have a plan to protect their property and assets for the future.

The stepped-up basis on capital gains

 Under current law, when an individual leaves an asset to an heir, it has a basis, which is the price from which it increases in value as calculated for tax purposes, or steps up to its full market value upon death. This mechanism allows for the passing of appreciated value to heirs, and if the asset is sold, the capital gains will only apply to any increase from the adjusted, but not the original, value.

If the step-up in basis were to disappear, it would put an undue burden not only on households and family businesses that would have to liquidate, but also constituents of areas of the country who may be rich in vast tracts of land, but who do not have liquid assets. Farmers and ranchers could end up owing millions of dollars on inherited land that has greatly appreciated value, and the heirs to family businesses would likely be forced to liquidate to pay the taxes.

The tax advantages in current law

Under the Tax Cuts and Jobs Act of 2017, the estate tax basic exclusions amount (BEA) increased from $5,450,000 to $11,400,000, which doubled for married couples to $22,800,000. As the exemption is portable, an estate planner can pass on assets to their spouse, who may then transfer these assets to their heirs.

Fortunately, proposals to accelerate the roll-back date on current exemptions have not materialized in current proposals, but the sunset clause remains in place. When making decisions on asset protection, estate planners would be wise to keep this in mind. For some, it may make sense to use some of these exemptions to make tax-free lifetime gifts, or to begin the transfer of assets to a dynasty trust, which will also circumvent gift and estate taxes.