Massachusetts Estate Planning & Asset Protection Blog

Step Up Basis Part 2

Posted by Dennis Sullivan & Associates on Tue, Mar 10, 2015

Losing the Step Up Basis Could be a Step Back On Your Estate Planning | Massachusetts Estate Planning Attorney

Last week we were discussing potential changes to the tax laws proposed by President Obama that would eliminate the step up in basis.  Obama claims the target is wealthy Americans but the change could have a much bigger impact on average middle class citizens.

     That’s because with the federal estate tax exemption currently at $5.43 million, only estates larger than that number must pay federal estate tax.  While Massachusetts estate taxes kick in on estates greater than $1,000,000, removing the step up in basis still means that many heirs would have to pay additional taxes on the assets they will inherit.

     Here is a common scenario:  Mary passes away and leaves her assets to her children.  Those assets include Exxon stock she and Frank bought many years ago and it is now worth $500,000.  The total estate is worth $1,000,000, including her home which Mary and her husband Frank purchased for $30,000, which is now worth $500,000.

     Under current tax laws, the children get a step up in basis on both the inherited stock and home.  Presuming they sell the home immediately after Mary’s passing, there would be no capital gains tax owed on the home.  The new basis would be the sale price.  The stock would also get a step up in basis.  The estate would owe approximately $25,000 in Massachusetts estate tax but no federal estate tax.

     If the step up is eliminated, the estate would still owe the same Massachusetts estate tax but now there would be an additional capital gains tax.  Obama’s proposal does suggest that some amount of capital gain be excluded from tax but let’s assume in my example there is no exemption.  Let’s also assume that the capital gains tax rate is 25%.  In that case, the tax on the home gain would increase to $95,000, almost four times what it is now.

     The tax on the stock would be more complicated to calculate.  We would need to figure out what Mary and Frank bought the stock for in order to determine the original basis. If Mary and Frank didn’t keep good records of their, it may be very difficult for their children to get them since they didn’t buy the stock themselves. The problems will only increase as well if there were stock splits or if the stock was bought in increments over time and different portions have a different basis.

     In any case, if the stock was held for many years then, it is safe to assume there would be substantial capital gains and the tax could easily exceed $100,000.  Add that to the tax on the sale of the home and you can see that a small estate of $1,000,000 could have additional tax of $200,000 or more, on top of the estate tax.

President Obama claims that he wants “wealthy Americans to pay their fair share”, but he doesn’t tell us that in the process everyone else will be paying more than their own fair share. Sure, the wealthy would be subject to this additional tax as well, but Obama’s plan clearly misses the mark.

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Tags: estate tax, estate tax savings, taxes, Tax Savings, Inheritance, 2015, heir, stock, step up basis

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