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Year-End Gift and Estate Planning: Recent Tax Proposals Bring Renewed Urgency

August 03, 2021

Individuals…you will want to read up on potential changes to your gift and estate plan including changes to the stepped up basis loophole and clawbacks. Read on.

President Biden’s tax proposals and Senator Bernie Sanders’ “For the 99.5 Percent” bill — and their potential impact on gift and estate tax planning — have received extensive coverage. Now several Senate Democrats have introduced another tax bill that could also have sweeping effects on your gift and estate plan. Read on to learn how this proposal — if enacted — could change the game.

STEP Act Targets Stepped-Up Basis Loophole

Currently, if an heir sells an inherited asset, the capital gains tax is based on the difference between the selling price and the fair market value on the decedent’s death. Essentially, the basis in determining the gain is the decedent’s date of death value.

So, any gain in excess of the asset’s tax basis (which is largely based on the asset’s original purchase price plus any improvements less any depreciation) is tax-free.

The “stepped-up basis” loophole is one of the largest tax breaks in the federal tax code. The Joint Committee on Taxation estimates it will save taxpayers $41.9 billion in 2021 alone.

Proposed legislation known as the Sensible Taxation and Equity Promotion (STEP) Act takes aim at the step-up in tax basis that allows heirs to avoid substantial capital gains liability for inherited assets that have appreciated. (Biden has also targeted this provision in his tax proposals.)

Under this bill — which is sponsored by Senators Chris Van Hollen, Cory Booker, Bernie Sanders, Sheldon Whitehouse and Elizabeth Warren — the first $1 million in assets would still receive the stepped-up basis. Plus, estates would be allowed to exclude up to another $250,000 of capital gains on inherited personal residences ($500,000 if inherited from a married couple).

Exceptions also would be allowed under the STEP Act for:

  • Transfers of certain tangible property,
  • Transfers to spouses and charities, and
  • Charitable trusts, disability trusts and cemetery trusts.

In addition, taxpayers would be allowed to pay the capital gains tax on illiquid assets, such as a farm or another business, in installments over 15 years.

Beware: The STEP Act — if enacted — would apply retroactively to transfers made after December 31, 2020.

No Clawbacks

The proposed changes to stepped-up basis rules would apply only to inherited assets, not gifts made during your lifetime. Gifts during our life never get a step up in basis; lifetime gifts are always transferred at carryover of basis (only estates get the step up). Under the Tax Cuts and Jobs Act (TCJA), any future changes to the amount of estate and gift tax exemptions won’t result in a clawback or recapture of transfers that already have occurred. That generally means you can safely make large gifts now.

Plus, other gift and estate tax proposals that Congress is currently considering aren’t expected to go into effect until after December 31, 2021. So, even if Congress passes legislation this fall, you still may have time to make proactive gift and estate planning moves before year end.

Why Wait?

Despite what Congress decides on the STEP Act or any other changes to the federal gift and estate tax rules, today’s favorable gift and estate tax rules won’t last. The TCJA is set to expire in 2026, returning gift and estate tax exemptions and rates to Obama-era levels. Contact our tax specialists now to ensure you don’t miss out on any opportunities to reduce taxes for you and your heirs.

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