Bloomberg’s recent headline tells the tale for many: The best-laid estate plans just got muddled.
If President Obama has his way, there will soon be a significant change in how assets are passed to heirs. It’s problematic for a few reasons. Of course, it will affect billionaires, but it could also affect those who aren’t as well-off from a financial perspective and who may not be able to cover the estate taxes. Remember, though, we now have a Republican Congress, so that offers some protection – or sense of protection – for now, but it could be an issue in the future for those worried about estate taxes.
Understandably, we’ve had a few clients contact us for guidance. Most are concerned about what it means for their more valuable assets, such as their businesses or home. We know the proposed new tax at death that could mean more than 60 percent in combined federal and state levies. That’s massive. The proposal will be released today, February 2nd and we should know more then, but what we’ve been privy to in recent weeks includes:
- A capital gains tax at death on the growth in the value of assets since they were purchased unless they’re donated to a charity.
- The plan, by the Obama Administration’s estimations, would raise an estimated $210 billion over ten years
- The plan raises the top capital gains rate to 28 percent from 23.8 percent.
- There would be a $200,000 exemption plus a $500,000 exemption for homes. For example: If the home you purchased for $250,000 is now worth $1 million, it would mean $500,000 of the gain would be exempt and a federal tax of up to $70,000 would be owed on the remaining $250,000 in appreciation. (And yes, we agree – it’s unfathomable)
So, the natural question is: How do I avoid this?
You could make gifts to those you love, even if some of them are taxable (let’s face it – it sure beats the alternative if by some twist of fate, this becomes law) since they don’t have to worry about estate taxes for a while. Fair warning: Capital gains taxes are due at the time the gift is made. If the gift grows in value, there may be another tax later on.
As it is now, an estate is assessed the federal estate tax with a top rate of 40 percent on property; however, don’t forget that it applies if an estate is worth more than $5.43 million (for married couples, it’s double the amount – $10.86 million). Capital gains are applicable only on the difference between the sale price and the value at the time of the inheritance.
The most important point to keep in mind is that none of this is written in stone and again, Republicans are calling a lot of the shots these days, but it is something to keep an eye on moving forward. If you have any questions or would like more information on how to protect your assets so that you have something to leave behind, contact our offices today.
- It’s Important to Have a Coordinated Estate Plan - July 29, 2021
- Revocable Trusts Are Not Always Treated the Same as an Individual - July 27, 2021
- Roth IRAs Can Be a Great Planning Strategy: Basics - July 22, 2021