As the discussion around the future of the federal estate tax continues in Washington, D.C., a good number of Americans are faced with the uncertainty about how these changes could influence their lives, even if they were not wealthy enough to have multimillion-dollar estates. In essence, the estate tax, although it is characterized as the “death tax,” is only applicable to the top 0.1% of the wealthy in the United States. However, if the tax is killed or revamped, it can trigger much more havoc than you can fathom. Below are the details.
The Estate Tax: What’s at Stake?
The current federal estate tax regime takes into consideration those with an estate worth more than $13.99 million for individuals or $27.98 million for couples married. More plainly, it means that the tax extends to the top 0.1% of earners. If, anyway, Congress weighs in on this and changes the law, the whole affair takes on a different twist, and that means you are not left out in all this.
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Despite the fact that the big-end removal of the estate tax would remove financial stress for the affluent, it carries along some significant drawbacks for families. Potential changes in the estate tax system are expected to impact the way people organize their estates and manage the inherited assets.
How Could a Repeal Affect You?
Aside from the obvious impact, that is, total eradication of the estate tax, a repeal proposal could also have some unforeseen consequences on your estate planning and tax strategy.
Loss of the “Step-Up” in Basis
The most serious outcome of an estate tax repeal is probably the loss of “step-up in basis.” This provision allows the beneficiaries of the deceased, including the stocks or property, to be assessed at the fair market value at the time the decedent died, rather than using the basis of the parent. What it leads to? Heirs are exempted from capital gains tax that would have resulted from the increase in value of these assets.
Should the estate tax be abolished, however, there is a probability that the step-up in basis would be gone as well, and hence it would result in the heirs being charged capital gains taxes on assets according to their original purchase price instead of the current value.
For instance, the receiver of a genealogy from an ancestor could be made the owner of property now valued at $500,000, while its original price was $50,000. Your duty without the step-up would be to pay $450,000 on the increased value, even if no estate tax was involved.
Increased Taxation on Inherited Assets through Capital Gains
Those people who were handed assets with no lift in basis are the individuals who are most likely to be affected by a drastic surge in capital gains taxes when their assets are being sold. This could even happen to people with estates that are much smaller than the allowable federal estate tax exemption. The capital gains tax would be the amount an asset had appreciated regardless of the estate tax situation.
If we say that you might experience an estate tax modification, there is the possibility of higher taxes on the earnings of a capital gain from inherited property or your investments that can become a severe financial challenge for middle-class households.
Trusts and Wills in Question
Although the estate tax respecting of the upper class was the focus, there are reasons for concern that the repeal might also be harmful to users of those instruments according to the individuals behind trusts or wills. The majority of the older estate plans were prepared anticipating an estate tax future which led to provisions that would minimize estate taxes on the other hand, like bypass trusts, which give the assets to the heirs in the process and cause a reduction of the estate tax.
Yet, in case the estate tax is abrogated, the references mentioned may not be important or necessary anymore. This situation could force the implementation of major reshaping of the old plans, whereas families might face unforeseen tax implications in relation to gains on the assets they have inherited.
What You Should Act on Right Now
If the estate tax is removed or tweaked, you must consult a knowledgeable lawyer to re-evaluate your estate plan. The following are some of the things you should do:
- Examine Your Estate Plan: Verify that your will or trust is in accordance with possible alterations in the tax laws.
- Rule of Step-Up: Be aware of the possible absence of the step-up in basis and how it affects your heirs and be ready to make the necessary adjustments which will reduce the tax burdens on the inherited assets.
- Be Awake: Watch out for news about estate tax legislation and make the amendments to your estate plan, if any, when necessary.
The Future That Nobody Predicts
While the cut of the estate tax affects a small number of U.S. citizens directly, it may cause grave repercussions for society as a whole. Actually, it may result in changes in capital gains taxes, loss of the step-up in basis and trust provisions, the elimination of the estate tax might undo established estate planning methods that have been in use for a long time.
It is essential that you review your estate plan now and keep it adaptable and that you monitor the status of the legislative discussions in Washington. Foreseeing the possible changes and planning for them would not only make you ready to face the future without any problems but also safeguard your heritage, keeping it from being prey to unanticipated taxes in the future.
