The estate and gift tax exemption has fluctuated over time allowing individuals to pass more of their wealth on to their families without having to worry about federal estate tax. In 2018, Congress passed legislation that set the estate and gift tax exemption to $11.58 million per taxpayer. Assets included in an individual’s estate that exceed the remaining exemption amount are taxed at the federal rate of 40 percent. In addition to the increased federal estate and gift tax exclusion, the assets within the estate receive an income tax basis adjustment that equals the fair market value at the time of the decedent’s death. The subsequent sale of the asset is impacted by capital gains only to the extent of the appreciation since the decedent’s death.

What does that mean in numbers?

An estate worth $15 million would be able to pass $11.58 million to heirs and selected beneficiaries without giving anything to the IRS. However, the remaining $3.42 million would be subject to 40% estate tax and would result in check to the IRS for $1.37 million. The heirs and beneficiaries would ultimately receive $13.63 million after estate taxes. This is assuming the estate is in a state that does not have estate taxes such as California.

The heir of the estate now decides that they would like to sell an asset that was inherited from the estate. Now their focus shifts from estate taxes to capital gain taxes. If the asset is worth more at the time of sale than it was at the time of the decedent’s death, they will be hit with capital gains on the difference. In terms of inherited assets, the capital gains could be minimal or non-existent in some cases.

How does the election play a role in tax planning?

The democratic party is pushing for the federal estate and gift tax exclusion to return to the historic norms. This would dramatically decrease the amount of wealth that can be transferred from one generation to another and increase the amount an estate would have to pay in estate taxes. Additionally, a political party change could mean the end to the longtime taxpayer benefit of the stepped-up basis at death for capital gains calculation.

With the election on the horizon, now would be a prudent time to consider wealth transfer strategies before the year end.

When to talk to an estate planning attorney?

If you are concerned that changes in the law could adversely impact your family, we strongly encourage you to schedule a meeting at your earliest convenience and before the end of the year. It is better to make informed decisions about your estate before it is too late.

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