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Biden's proposed tax changes would impact trusts, estates | Elder Law

Pocono Record logo Pocono Record 5/4/2021 Lori Cerato
a person smiling for the camera: SAGE - Lori Cerato © PHOTO PROVIDED SAGE - Lori Cerato

President Biden outlined a proposal including a number of tax changes that will affect trusts and estates. 

All of his proposed changes will need to be enacted by Congress to become law, and any of its provisions may be revised or eliminated.  

Last month's 'Elder Law': Did you receive a delinquency notice about your inheritance tax return?

The changes that would affect trusts and estates relate to the federal estate tax and capital gains tax. Since 2018, only estates valued at $11.7 million for individuals and $23.4 million for married couples are subject to the estate tax and the top tax rate is 40%.

Federal estate tax applies to all assets transferred at death to heirs, including life insurance, and there is no exemption for assets passing to a surviving spouse.

Biden proposed reducing the federal estate tax exemption to $3.5 million per person ($7 million for a married couple) which was the exemption in 2009, and increasing the top tax rate to 45%.

In 2018, only 1,900 estates paid an estate tax according to the Urban-Brookings Tax Policy Center.  

Changing the capital gain tax is likely to affect more heirs than lowering the amount of the estate tax exclusion. A capital gain occurs when an asset is sold for a higher price that it was purchased for.

The purchase price is called its “basis.” When you inherit an asset, the “basis” is the value at the time of owner’s death; known as a “stepped-up basis.” Capital gains are only taxed once the heir sells the asset at a profit based upon the value of the asset when he inherited it (not what the original owner paid.) Biden seeks to repeal the “stepped-up basis” rule.  

Biden proposes to tax unrealized capital gains at death, regardless of whether the heirs sell the asset. Heirs would owe tax based on the difference between what the decedent originally paid and the value at the time of death. This change would affect all heirs, including those receiving modest assets.

For example, your father bought stock at $50 per share in 1995 which has a value of $200 per share at his death. Under current tax law, your basis is $200.

You will owe a capital gain tax if you sell the stock for more than $200. Under Biden’s change, your basis is $50 and you owe capital gain tax on the appreciated value of $150 per share at the time of your father’s death whether or not you sell the stock.  

Lori Cerato is a Stroudsburg attorney concentrating her practice in the area of elder law. If you would like to see a particular question covered in this column, email poconorecord.sage@gmail.com.

This article originally appeared on Pocono Record: Biden's proposed tax changes would impact trusts, estates | Elder Law

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