past, the estate tax rate has been much higher than it is today (along with the amount that families can pass on tax-free being much lower in years past than in 2020). Experts predict that an estate tax rate in the neighborhood of 60% would be the most likely “landing spot” if the democratic party is able to pass legislation to make the changes. 3. Step-Up Basis The “Basis” or “Cost Basis” of an asset relates to how much an individual paid for an asset when he or she bought it versus how much it appreciated (or grew in value). Normally, if you purchase $100 worth of stock, and then sell it for $2,100, you have a gain in value of $2,000. That $2,000 gain will be subject to capital gains taxes. However, under current law, when someone passes away, the people who inherit the assets (stock, house, etc.) receive what is known as a step-up in cost basis, which goes to the value of the asset on the day the person passed away. The advantage is that any gains/appreciation in value during the original owner’s lifetime are not subject to any sort of capital gains tax if they are passed through an inheritance. In the example above, even though the stock was purchased for $100, when the children inherit the stock (which is now worth $2,100), they will receive a step-up in cost basis to $2,100. If they were to sell the stock right now, there would be no capital gains tax applied to that sale.
Right now, the republicans have no plans to change this tax benefit for those who receive an inheritance at death. They want to keep the current laws in place that free the family members who receive the assets from having to pay taxes on the appreciation of the asset while the original owner was still alive. On the other side of the aisle, the democrats are in favor of repealing the step-up in basis. Using the example above, when the original stock-owner passed away, the heirs would be subject to the same capital gains tax on the $2,000 that the stock appreciated in value when they sell (just as if the original owner sold the stock himself or herself). Overall, these are two very different philosophies. Historically, there has never been a period where families could pass so much wealth to their heirs with such a low tax burden. It is very “cheap” to leave an inheritance, because of the large amount that can be passed on tax-free, the (relatively) low estate tax rate, and the step-up in basis that eliminates capital gains tax on inherited assets. Certainly, arguments can be made both ways. The republicans generally want to lower (or eliminate) instances where an estate is taxed at death. The democrats are seeking to return the tax rates to more traditional and historical levels. Who knows, by the time you read this article, we may already know what the future holds.
Christmas Holiday Office Hours:
Since this will be our last newsletter of 2020, I would like to wish each and every family that we have worked with a Merry Christmas and a blessed holiday season. 2020 has been quite a crazy year. However, we have been lucky to have the opportunity to serve our clients and their families. Please remember the true meaning of this holiday season and spend it with the ones you love (as safely as possible).
As a reminder, our office will be closed from Christmas Eve (Thursday, December 24th) through New Year’s Day (Friday, January 1st). During our holiday break, phone and email messages will be monitored for emergencies. We will re-open during normal business hours on Monday, January 4th. Merry Christmas and Happy Holidays!
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