‘Step Up’ Stepping Down?

In his State of the Union address, President Obama outlined some proposed tax changes including ending the “step up” provision in the capital gains tax.

Although Congress is unlikely to go along, it could mean big changes in how inheritances are taxed.

The Obama plan would eliminate a big tax benefit in the treatment of inheritances. It would tax capital gains on the decedent’s basis — what the stock or other asset cost when he or she bought it — compared to the current system that allows for a step-up in basis for assets passed on to heirs.

The change would make it harder to shield assets from taxes and would require more planning, says a story on wealthmanagement.com.

It would close a “trust-fund loophole” and ensure that the wealthiest pay their fair share on inherited assets, the president says.

But it would result in taking money out of the pockets of beneficiaries. And it would require a lot of work. For example, heirs would need to determine the original cost basis for all of the assets they inherit. Tracking every stock, piece of property and valuable to find out their original costs.

The plan would allow married couples to bequeath investment assets with capital gains up to $200,000 tax free, however. And a couple can bequeath a home to a child and $500,000 in capital gains wouldn’t be taxed. As a result, many heirs won’t be hurt by the changes.

However, for those who would be affected, the plan would require the establishment of new trusts to protect assets from the new taxes.

If you have questions about estate planning, feel free to call us for a consultation at (626) 696-3145.

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