If you make over $400,000 a year or have a sizeable estate, you may be worried that taxes could go up soon. Although it’s hard to say what Congress might do, increases in capital gains taxes and estate taxes, along with a reduction in the estate and gift tax exemptions, are on the table.
One idea being floated is ending the step-up basis rule for estates. For decades, an estate’s assets have been valued at the time of the estate owner’s death, even when the value of those assets had risen over time.
For example, if the estate included stock that was purchased at $1 per share but is now worth $10 per share, the estate saw a gain of $9 per share. Nevertheless, when the stock is passed via probate, the stock is treated as if it were valued at $10 all along. No capital gains taxes are owed. And, as long as the estate is smaller than $11.7 million (individual) or $23.4 million (couple), no estate tax will be owed, either.
The step-up basis may have made sense when purchase records were kept manually and could be hard to locate after significant time had passed. However, there are many who argue that its utility is long past in an age where cost basis can be obtained almost instantly.
If the step-up basis rule were ended or the capital gains rate were raised, many people would be looking to take advantage of the previous rules. You may have an opportunity to do that, as tax changes aren’t usually made retroactive.
Talk to an asset protection attorney about your options for transferring assets now. Here are three options to consider:
A lifetime charitable remainder trust allows you to get an income tax exemption for a large donation while retaining income from the donation during your lifetime. You donate to the trust and take the income tax deduction. The earnings from the trust are yours for your lifetime. Upon your death, the trust becomes the property of your chosen charity. You may see additional tax advantages by choosing appreciated assets like stock to fund the trust.
Selling part of all of your business to a trust could shield some of your assets from later taxation. The idea is to sell your income-producing assets to a trust in exchange for a promissory note. The trust is now the legal owner of the business, so it need not be transferred in probate and is not subject to any estate tax. The balance of the promissory note would be subject to the estate tax.
A spousal limited access trust (SLAT) could prevent a reduction in the estate and gift tax exemption from touching some of your assets. The idea is to take advantage of the current $11-million exemption by transferring assets now that you would ordinarily pass at death. You set up this irrevocable trust for your spouse’s benefit, transferring assets that might otherwise reach probate now, while the exemption is high. Take care not to create two identical trusts or the IRS may challenge their eligibility for the estate and gift tax exemption.
It’s worth saying again that we don’t know what changes, if any, Congress will actually make. Talk to your business attorney about whether a trust like one of these could put you in a safer position.