If Biden wins on Tuesday, it could have a big impact on the Estate Tax issue. Making headlines is his promise to roll back the lifetime gift exemption from its current $11.58M to $5M per individual. Granted, while this may impact the Treasury’s coffers, it doesn’t impact many of us.
But there is another part to his plan that will impact many of us in the Hill Country. Biden is looking to do away with the “step-up in basis” for inherited assets. The importance of this for some of you can’t be overstated.
Currently, if you inherit an asset, whether it be a stock, piece of real estate, art or anything of value, your cost basis is determined as the value of the asset on the day of the death of the person who gifted it to you.
For example, your father owns ABC stock which he bought in 1971 at $5. Today, the stock is valued at $100. If he were to sell it, he would owe long-term capital gains on $95 of realized gain. If he passes away on 8/1/xx and the price of the stock is $100 on that day, your cost basis when you inherit the stock is now $100. If you subsequently sell the stock on 10/1/xx at $105, you would only pay capital gains on $5 of realized growth.
For those who stand to inherit or gift highly appreciated assets, say land here in the Hill Country, this could have a huge impact the taxes someone will eventually owe on the sale of the asset. Granted, the taxes are only paid when the gains are realized, as of now, but the realized gain will likely be far in excess of what it would be if the heir received a step-up in basis.
How to plan for this potentially adverse change in the tax code will depend on a litany of factors. Is the asset liquid or illiquid? Who will inherit it? And what will their plans for the asset be? These are just a few of the factors that need to be considered.