Last week we addressed how new proposed tax law may lower the federal gift and estate tax threshold and prohibit current gifting strategies to lower Massachusetts estate taxes, as well as the window right now to take advantage of those current strategies. If you did not get a chance to read that blog, go check it out here.
Today, we want to consider another part of the proposed tax law, which could also dramatically affect estate planning. The federal government is proposing to do away with the current step-up in basis at the time of death, which would accelerate capital gains taxes.
Under the current law, if someone dies owning property, the property will receive a full step-up in basis for tax purposes. Let’s take, for example, someone who has Apple stock that they bought at $100,000.00 and it is now worth $1 million. If that person sold it during life, there would be a capital gains tax at a rate of 20% on the gain ($900,000), which would result in $180,000 of capital gains tax. If that stock instead passed to their children after death, the $100,000 basis is stepped up to the fair market value of the property at the time of death. This means that the children’s basis would be $1 million, and if they sold the property immediately at death, there would be no capital gain. Typically, we do not gift low-basis stock during someone’s life since gifting low-basis stock results in a carry-over basis where the children receive the stock with the same basis their parents had (in our Apple example $100,000), and they would then incur the capital gain upon the subsequent sale. As the capital gains tax is generally higher than the MA estate tax, there is often no net tax savings by gifting low-basis stock (obviously situations are unique, so each situation should be reviewed on a case-by-case basis by someone who has knowledge of tax and estate planning).
In light of the potential changes in the capital gain tax law, our opportunities to gift to lower Massachusetts and possibly federal estate tax must be reviewed because if the step-up in basis goes away, the gifting of low-basis stock becomes much more attractive for both Massachusetts and federal estate tax purposes.
Here at Family Estate Planning Law Group, we can guide you through evaluating the best estate and tax planning strategies for you and your loved ones in light of the potential law changes. It is important that you come see us or another knowledgeable estate planning attorney in the next 2-3 months if you wish to take advantage of the planning window before new laws go into effect. It is likely that if enacted, the new laws may be put into effect December 31, 2021, and any planning would need to be completed (not started) before that time.
To learn more about how we can help you and your family take advantage of this window for gifting strategies or about how we can help you to have peace of mind through holistic estate planning, visit our website, explore our blog, and schedule your complimentary consultation today!