Biden Administration Tax Plan: Estate Tax, Tax Cuts and Jobs Act, and Step-up in Basis Rule

Atty. Chris Berry discusses the proposed changes about Estate Taxes in the Biden Administration.

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Episode Transcript

Changes to the Estate Tax

Hey, this is Chris Berry with Castle Wealth Group and today we’re going to talk about how the Biden administration may spell changes to the estate tax and stepped-up in basis rule. If you like this information, please make sure to subscribe to our YouTube channel.

Christopher Berry is a leading estate attorney and advisor in the area of retirement and legacy planning. He has been featured in publications such as Forbes, Kiplinger’s, Crain’s Detroit and more. He’s the host of the weekly radio show and podcast, The Chris Berry Show. He’s a national thought leader as it relates to retirement and legacy planning and as authored the Amazon best selling book, The Caregiver’s Legal Guide.

We’re looking at the Biden tax plan and understand that this is just proposed changes to the estate tax and stepped-up in basis rule. But these are potentially very big changes so we need to talk about where things are at and where things are going. With regards to estate taxes, the way estate taxes work is when you pass away, the government takes another swipe of your assets, but they’ve been nice enough to give us an exemption or coupon, meaning as long as we die with less than whatever the exemption is, we owe zero in estate taxes. Now we still have to worry about income tax, especially on the pre-tax IRAs and the 401(k)s, but as it relates to estate tax, another swipe so almost a double tax, you don’t have to worry as long as you’re below the estate tax exemption, which currently is at $11 million adjusted for inflation for individual and for a married couple with inflation factored in, it’s about $23 million. As long as you die with less than $23 million as a married couple, you owe zero in estate taxes.


Reverting Back to the Pre Tax Cuts and Jobs Act Estate Tax Exemption

Now, here’s a couple of things the Biden administration has proposed. First, they want to repeal the Tax Cuts and Jobs Act that was enacted by Donald Trump. What this means is that that $11 million exemption, estate tax exemption will drop down to $5 million adjusted for inflation. For a married couple, that means the $23 million exemption will drop down to $11 million adjusted for inflation. It’s actually 10 million, but with all the inflation built in, it’s now $11 million for a married couple. Meaning we’re reverting back to the pre Tax Cuts and Jobs Act estate tax exemption. Now Biden wants to take it one step further and he wants to lower that estate tax exemption for a single individual from five million, which was what it was under Obama, down to three and a half million.

If you have more than three and a half million dollars of assets, counting real estate, life insurance, even if it’s death benefit life insurance, could be term life insurance, 401(k)s, IRAs, business interest, farms. You pass away with more than three and a half million dollars, that could be taxed up to another 45%. That’s one thing to keep mind of if you have an estate within that range.

Now here’s something that’s going to affect a lot more families and this is what I call a stealth tax because it’s kind of hidden. It’s hard to understand. Normally, unless you’re educated on this topic, you’re not going to pay attention or your beneficiaries might not pay attention. And what he’s talked about is getting rid of the stepped-up in basis rule. And this is big, especially for a lot of Michigan families that might own real estate and have a family farm. The way step-up in basis works is I’ll talk about how it works now and then I’ll talk about under Biden’s proposal, how it may work in the future.

How it works now is let’s say you bought something for a $100,000. Could be a piece of real estate, could be a lot of stock and then you die and it’s valued at $200,000. And then the kids sell it for 210. How much in gains will they have to pay? Well right now we have step-up in basis where if you pass that real estate or investment properly, instead of being a 100,000 to 210 and now they have to pay the gains on that, it’s just 200, the date of death to what they sell it for. If the date of death was valued at 200,000 and they sell it for 210, there’s only going to be $10,000 worth of gains your beneficiaries will have to worry about because of that step-up in basis.


Removing the Step-up in Basis

Now here’s what Biden is proposing. He’s proposing removing the step-up in basis, meaning that if your family originally bought something for a $100,000 and then you pass away leaving it to the next generation and they sell it for 210,000, they’re going to have $110,000 worth of taxes worth of gains that they’re going to have to pay. And this is a big stealth tax. It’s going to affect a lot of families. If you look at your non-qualified stocks or your investments, you have a lot of Ford stock, you have a family farm, you have real estate. This could have a dramatic effect on what your children will receive as an inheritance. I lump both of these as what I call death taxes. One is an obvious one, the estate tax exemption. We look to see where it’s at, but if Biden proposes or gets this removal of the step-up in basis pass through, understand it can have a dramatic and probably even more of an effect for more families than talking about the estate taxes.

If he does remove the step-up in basis, understand that’s going to affect a lot of families, not just the very wealthy families, it’s going to affect the families that have had that family farm for a number of years or that cottage up north and now the kids have to sell it or that stock that’s been in the family for a number of years. That’s going to affect all of those families. Something to be mindful of, there are certain things, strategies you can do, especially on the estate tax side right now, if you take advantage of this window of opportunity.

This has been Chris Berry with Castle Wealth Group. If you find this information helpful, feel free to subscribe to our YouTube channel. Thank you so much.

Castle Wealth Group has clients across the nation and helps families plan, protect and preserve what is important by creating a retirement and legacy blueprint.



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