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The One Part of Biden’s Tax Plan That Could Impact Estate Planning for Most Regular Folks

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The tax plan proposed by Vice President Biden would likely have two main effects on estate planning if it is enacted. The first would be a change in the value of an estate that is exempt from federal estate tax. Under President Trump’s 2017 change to the estate tax, the first $11.58 million of any estate (in 2020) is exempt from estate tax. Biden’s plan would potentially reduce this exemption back to the level that existed prior to President Trump’s presidency, which is around $5 million or so. For many Americans, this change probably will not require much, if any, change to their estate plan.

However there is one potential change that has the potential to impact a much larger number of Americans: the change to the rules regarding a ‘step up’ in basis.

Essentially the issue is this. Currently, there are rules in place that give families favorable tax treatment when an asset is inherited that is potentially subject to capital gains tax. This would include assets like a home or stock. Capital gains are the ‘profit’ that you make when you sell such an asset. You then pay tax on those gains. For the most part, we calculate these gains by looking at what it cost to buy the asset, then subtracting that from the sales price. This gives us the ‘gain’ for which we then pay a tax.

But presently the rules are slightly different when you inherit an asset. In that case, we subtract the fair market value on the date of death of the owner from the sales price. This potentially makes the taxable ‘gain’ much smaller, meaning less tax to be paid for the person that inherits it.

Consider the following example. Your grandmother buys 100 shares of stock in 1980 for $5 per share. When you inherit that stock now, the value is $75 per share. If your grandmother were to sell those stocks before she passed, the capital gain would be the sale price minus the purchase price.  ($7500 – $500 = a gain of $7,000). That $500 value is her “basis” in the stock.

However, if you inherit the stock, then under the current rules, your basis wouldn’t be the $500 that she paid for it back in 1980. Rather, it would be the value of the stock on the date she passed (which would be higher than the $500 purchase price). As a result, because your basis is now higher (or ‘stepped up’), the taxable ‘gain’ is much less.

Most regular folks may not have an estate in excess of $11.58 million, or even $5 million. However, the change in the ‘step up in basis’ rule has the potential to impact most Americans right in the assets where they typically hold most of their wealth: their homes and stock holdings.