The new administration has made their tax priorities clear. They would like to return taxes to the prior levels. One of the most significant changes could affect the tax at transfer of the assets to heirs at death. With the administration’s party now controlling both the House and the Senate, the possibility of these tax proposals becoming law have increased.
Let us look at a couple of the proposals:
Estate Tax Exemption
The new plan would reduce the current estate exemption by approximately 50% from its current level of $11.58 million to $5.5 million, restoring the estate tax to previous levels. It has also been discussed that the exemption could even drop to $3.5 Million, where it was when President Barack Obama took office.
These changes would affect business owners, farmers, and others with assets to transfer from one generation to the next. In this event, old tax strategies that have been buried for years will be exhumed (more on this later).
Step-up in Basis
The second major change discussed in the new administration’s tax plan is a repeal of the “step-up in basis” rule that has been in effect for decades. If this change is implemented, it would affect everyone who has valuable assets to leave to heirs. Here is an example: If a stock is purchased for $10 but it has appreciated to $100 when the owner dies, the capital gain is $90. When the stock is passed to heirs, the embedded taxable gain is wiped out and no tax is owed. If the new owner then sells the stock, the gain would not be taxed because it was “stepped-up” at the time of death of the original owner. This treatment applies to many assets including stocks, mutual funds, family homes, and business property.
Up to this point, the “step-up” rule has been a huge benefit to those inheriting real estate, business interests and equities from parents or other relatives. Imagine trying to determine the gains on IBM or AT&T stock purchased in 1960’s. Or paying the gain on a family home purchased in the 1950’s for $5,000 currently worth $500,000 at death.
The repeal of the step-up in basis rule could affect people of all income levels, not just the wealthy.
If the repeal becomes law, the importance of tax planning and estate planning will become even more important to preserve wealth at transfer from one generation to the next. I believe the use of Trusts and other sophisticated planning techniques will become commonplace, as they were in years gone by.
When you work with any of the advisors at Medallion Financial Group, we can help you chart a course through the complex world of wealth management and investment planning. We work together to build a dedicated, long-term, and disciplined approach that is tailored to your unique needs and objectives. Are you ready to start a conversation?
About the Authors
John and Laura Stohlman have been working with clients to help them achieve retirement success since 1987. Both John and Laura have the following designations: Certified Financial Planner (CFP®) and Chartered Federal Employee Benefits Consultant (ChFEBC®).
At Medallion Financial Group, we believe financial planning is about Family. We have been helping families invest in the future since 1987 through a holistic planning approach. We recognize there are a variety of needs when it comes to retirement planning, plan rollovers, annuities, college planning, life insurance options, and investment management. It is easy to get lost in a sea of choices. Our financial advisors help with the basics and beyond to enable our clients to get the education, advice and management they need to retire with confidence.
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Securities and investment advisory services offered through H. Beck, Inc., Member FINRA/ SIPC. H. Beck, Inc., and Medallion Financial Group are not affiliated. In accordance with IRS Circular 230 Disclosure, and to ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax-related information contained in this material was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
Roth IRA rollover may not be suitable for all individuals and tax consequences may apply. Rollover of the non-Roth portion into a Roth IRA is a taxable event. Tax issues involving IRAs can be complex. Please consult with your tax or legal adviser regarding your specific situation. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.