During tax season, we are often confronted with the reality of our finances, property and assets. While it is always good to gain a full financial picture of your personal and family assets, it is also important to take steps to ensure they are protected. This is why it is a good time to consider creating or updating your estate plan.
Estate planning
Designating a beneficiary for your retirement accounts and life insurance policies may give you some assurances for the future; however, this step does not protect your entire estate when it comes to ensuring it your property and assets are passed along to the heirs you desire.
The estate planning process is a vital step everyone should take no matter their age or level of wealth. For many, creating an estate plan is about the smooth transfer of assets to their beneficiaries, but it is also a mechanism to build and preserve wealth and minimize or avoid taxation. However, those looking to pass their assets across generations with ease may encounter new challenges, as the current administration is discussing the elimination of the step-up in basis.
What is step-up in basis?
In simple terms, step-up in basis is a tax provision that is designed to adjust the value of an inherited asset to the fair market value at the time of the owner’s death. For example, if a child is set to inherit their parent’s house that was originally purchased for $200,000 50 years ago but is currently valued at $800,000, the child would inherit the house at its stepped-up value of $800,000.
Without step-up in basis, an heir would inherit the original purchase point as their basis. This means that if they sell the asset for its current value, they would be responsible for capital gains taxes on the appreciation. For many, this would mean a massive tax bills. It could also mean losing a home that has been in their family for generations because they cannot cover the tax obligations caused by this inheritance.
If the elimination of step-up in basis is a concern of yours, it is important to consider the estate planning strategies available to you. This could include creating trusts, using gifting strategies and taking on tax-efficient investing strategies. A legal professional can help you understand how this and other policies could impact your estate plan. This can help you take proper steps to creating an estate plan that protects you, your assets and your heirs.