Inheritance tax: will the increased base be abolished?

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A recent proposal by President Joe Biden raised the possibility of eliminating the base mark-up that allows families to leave certain assets to their heirs without having to pay capital gains tax. The current inheritance tax rules have greatly impacted the ultra-rich, but this proposal in the American Family Plan could impact a larger group.

In an April 28 speech, Biden said the plan would close the loophole, “ending the practice of ‘raising’ the base of earnings above $ 1 million ($ 2.5 million per couple) and s ‘Ensuring that winnings are taxed if property is not donated to charity.

The basis is the original value of a house or other asset (stocks, land, collectibles, etc.) at the time of its purchase.

Current tax law states that when a person dies, the base is increased upon death, to fair market value on the date of death. For example: If a relative bought a house for $ 1 million and it is now worth $ 5 million, the heirs would pay no capital gains tax if they sold the property at its current value.

Who would be impacted by this proposal?

Although details of Biden’s plan have not been released, this tax proposal could create significant capital gains taxation problems for households inheriting a home.

This potential change could impact a larger group of people, says Daniel Fan, managing director, head of wealth planning at First Foundation Advisors, a financial institution based in Irvine, Calif.

Take the example of a widow who, several years ago, may have bought a house that has appreciated significantly in value because the area has seen a sharp increase in the value of her home. This person may not have any wealth outside of the home ownership, so they continue to live in the home.

When that person dies and a child inherits the house, instead of getting a basic mark-up, which would result in no or little tax when the house is sold, there could be significant taxable gains if the rule is deleted.

Eliminating the base increase would affect beneficiaries of estates containing assets that have appreciated in value by more than $ 1 million, said Mike Winn, managing partner of Audit Family Wealth Advisors, based in Los Angeles.

“For estates with long-term real estate investments having the basis established as value at the time of purchase rather than at the time of inheritance, this could be extremely costly,” he says.

Many people in large metropolitan areas such as New York and Los Angeles will likely be affected due to the surge in house prices in recent years. This would disproportionately affect people living in large metropolitan areas.

How likely is this change to take effect?

This proposed tax change is unlikely to garner support, according to several experts. Presidents have a long history of making proposals, and it should be considered the first offer in a negotiation, says Kevin Matthews, professor of accounting at George Mason University.

“When discussed, this could have a big impact on ordinary Americans who inherit property from the death of a loved one. I think this proposal could go wrong, ”he said.

According to Winn: “Changes to the tax code are always very political and require 60 votes to pass in the Senate, assuming the legislation comes out of the House. Between the lack of political will and the accounting difficulties that this would entail, it seems unlikely that this will pass.

While it is difficult to predict how Congress will vote, “given the small majority held by Democrats, it is not clear whether such a change would be passed by Congress and become law,” Fan said.

How can I start preparing my finances now?

Biden’s plan could be “particularly devastating” for children or other heirs inheriting illiquid assets such as homes, says Azriel Baer, ​​estate planning attorney at Farrell Fritz, PC in Uniondale, New York. To pay a large capital gains tax, children may be forced to sell a house.

“If you think your parents will leave you with a residence with substantial value but a low tax base, consider discussing with them the possibility of donating the asset to you in their lifetime,” he advises.

This aspect of the tax code really affects beneficiaries who do not currently own the assets, so there is little they can do in particular.

The current exemption from inheritance and gift tax is $ 11.7 million per person, so a married couple can typically protect up to $ 23.4 million from inheritance taxes.

“Due to the currently high inheritance tax exemption, few families will be subject to possible double taxation,” Fan said. “The problem is that if the inheritance tax exemption is reduced, clients may have to consider whether it would be better to donate assets now and remove any additional appreciation of the tax liability. inheritance tax or to keep the assets and to face the heirs a possible significant double. fiscal scenario.

What else do I need to know?

Biden’s tax base proposal would allow family businesses and farms to be exempt from capital gains tax if heirs continue to operate the business.

Potential grantees can keep tabs on what’s going on in Congress and what changes are actually being made. There have been proposals in the past to make changes to the intensification and trade of Section 1031, Winn says.

“But these aspects of the law are the cornerstones of the real estate market which is a huge engine for our economy and some of these legislative changes would have a very negative impact, which is why I hope the changes will be minimal,” he says. .


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