Tax law changes are on the horizon, and there are some we should start thinking about. Imagine this, you own a family farm that has been passed down for generations. You have plans on passing it down to your kids someday, but you wake up one morning to headline news “Official: The Step-Up Cost Basis No Longer an Option!” Now the family farm that has been passed down for years and years, becomes taxable on all of the growth it accumulates from the latest cost basis. Not only that, but your estate tax rate might also be increasing, causing a double whammy for some families.
So, you might be thinking to yourself, ‘Okay, but what am I supposed to do about it? If the law changes, there’s not much we can do, right?’
Well, not so fast. Though there is nothing we can do to change the law, we can start planning for things now to avoid scrambling when that day comes. Take trusts for example, if the tax rules change many considerations in our clients trusts and generational planning strategies will need to be amended, and everyone will be trying to get in with their wealth advisors and estate attorneys at the same time. If we can be on the front end, where we can plan out how these new rules might affect you and your family and be on the short list with the attorney should they go into effect, this saves a lot of time, money, and stress down the road.
So, what’s changing? It’s important to keep in mind that as of right now these are merely proposals, meaning that many of these things will go through several renditions before anything becomes law. That means that while we should start planning for the possibility of these things, we shouldn’t jump the gun and start officially changing our strategy just yet, and as we see different iterations of these proposals, we should continue to update our plan.
The Lifetime Exemption for Estate and Gift Tax
Currently the lifetime exemption for both estate and gift tax is set at $11.7 Million, meaning that only estates over and above this amount will pay the federal estate tax. The proposal outlines reducing this amount significantly, with some suggestions of going back to 2009 levels of $3.5 Million. There is an additional proposal to drop the lifetime gift tax exemption to $1 Million.
Top Federal Estate Tax Rate
The top federal estate tax rate currently sits at 40% for those with estates worth over $11.7M. The proposal suggests bumping this maximum rate up to 45% for estates over the exemption amount.
Today, if you inherit an asset that has appreciated in value over the owners lifetime, you receive a ‘step-up’ in basis, meaning that the appreciation is not taxable to you when you decide to sell the asset. If the asset appreciates over that stepped-up amount, then upon sale that difference will be taxable.
The proposed changes get away with stepped up cost basis entirely, meaning that any appreciation of an asset beyond it’s original value will be taxable. If this goes through, it will change the gifting strategy that many families have in place to leave their families a legacy.
Similar to the federal estate tax rate above, there has been a proposal to increase the income tax rate on the highest income earners. This would bump the top marginal income tax rate from the current 37% to 39.6% for households earning more than $400,000/year.
Other proposals, such as increasing capital gains tax, making changes to payroll taxes and raising taxes on corporations are also on the drawing board.
Are any of these proposed changes hitting home with you? If you think there is a possibility that these things would cause a change to your financial plan, the time to talk to your advisor is now. Sit down with them and come up with a plan, discuss with your estate attorney and outline next steps should any of this become law.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.