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Caring For Generations

Stepping Up Now in Case Step-Up is Repealed

On Behalf of | Jan 20, 2021 | business planning, charitable giving, estate and tax planning

The incoming presidential administration has revealed their plan to repeal the step-up in basis at death, and, at Geyer Law, we’re talking to our clients about adjusting their estate planning strategies to fit a potential no-step-up reality…

How Step-Up Works
Under current law, when you sell an asset for more than you paid for it, that asset is generally subject to capital gains tax. But when an individual dies while still owning an appreciated asset, the beneficiary’s tax basis in the inherited asset is measured by its value as of the original owner’s date of death, not the value on the date of the asset’s purchase. In other words, the capital gain or loss accumulated during the owner’s lifetime disappears.

The proposed change
The Biden administration proposes to repeal the step-up, meaning that capital gains tax would apply on any unrealized appreciation of assets. It is not yet clear whether the tax would apply upon the original owner’s death or only upon a subsequent sale of the asset by the beneficiary.

What measures can be considered in light of this potential repeal?

1. Carpe diem (seize the day) – As counter-intuitive as this may first appear, parents and grandparents who own assets that not only are appreciating rapidly, but are likely to continue growing in value (real estate, stock, or business interests), may consider triggering capital gains now to prevent beneficiaries from inheriting a large tax liability upon the owner’s death.

2. Life insurance – Life insurance is taken out on the life of the current owner, with the benefit going to cover the beneficiary’s anticipated capital gains tax liability. An Irrevocable Life Insurance Trust, or ILIT, is often used for this purpose.

3. Harvesting losses – “To save on taxes from capital gains, investors need to plan and time gains and losses in their portfolios,” advises Stacy Francis for CNBC. Temporary dips in the value of your investments can become a tax-savings opportunity to offset sales of securities at a gain.

4. Accelerate gifts – to heirs and to charity – Consider gifting valuable real estate or business interests today, rather than after death, using GRATs (grantor retained annuity trusts) or CRATs (charitable remainder trusts).

5. Document valuation discount information – When interests in a closely held business are inherited, a value must be determined for estate tax purposes This is no exact science, as the Journal of Accountancy points out; often there is no identifiable market for those business interests. Current law allows for the fact that the inability of the beneficiary to convert the business interests to cash, plus the fact that perhaps only a partial interest in the business has been passed to the beneficiary, may qualify the estate for a “discount” in terms of taxes. Changes to this law have been proposed in the past, and could be part of changes made under the new administration. The more thorough the business accounting has been, and the more complete the planning in anticipation of transfers of business interests, the better the chances of qualifying under whatever the valuation discount structure is in effect at the time of the death of a business owner.

At Geyer Law, our mission is to help clients “step up” now, creating detailed estate planning tactics and strategies, just in case the law changes and the step-up “steps away”.

– By Rebecca W. Geyer & Associates