Estates may carry more in taxes under proposed tax change

Families who own homes and farms cannot elude taxes, only use tools to minimize them. One of the most effective means they employ to reduce their tax burden lies in the concept stepped-up basis. A proposal from the Biden Administration to eliminate this method of tax calculation on an inherited asset could impact family estates dramatically.

Stepped-up basis versus carry-over basis

Basis represents, for tax purposes, the original cost or capital investment for a property. Stepped-up basis refers to having the property’s (usual inherited) basis increased, or “stepped up” to match current market value, as opposed to carried over.  Joe, for example, purchases a farm for $1,000 – the basis – in 2021. Upon Joe’s death, his children inherit the farm, which has a $4,000 market value, or the stepped-up basis. The children pay taxes only on the amount over $4,000 and only when they sell the farm.

Under the American Families Plan, the Biden administration will apply carry over basis as the standard by which to calculate taxes. Joe’s children, in the above example, would pay taxes on any amount over $1,000.  The original basis would carry over to the new owners. Carry-over basis applies generally, at present, only to property gifted another.

Value of several sectors of economy potentially taxed

According to a recent study, the proposed change would permeate numerous sectors of the economy.  Capital gains taxes impact manufacturing, housing and farming, among others.  Furthermore, the timing of tax burden could change significantly, depending upon the implementation of the carry-over basis.

Tax allocation comprises only part of a comprehensive estate plan

Families and businesses continue to confront the unforeseen challenges that emerged in 2020. Prudent estate planning requires continually adapting to changes in public policy and under one’s own roof.  An attorney with experience in and an understanding of complex rules and laws can develop a strategy to bring value to one’s beneficiaries.  An attorney with experience.