How Biden’s Capital Gains Tax Plan Could Affect You
President Biden’s capital gains tax proposal, if passed, may result in the need for some clever estate planning. In the past, estate planning was typically seen as a priority for families with a certain net worth. The utilization of the lifetime gift exclusion allowed many individuals and families to bypass estate taxes with proper trust planning. There were rumors that the dollar amount for that lifetime gift exclusion would be significantly reduced in Biden’s proposal. We may have dodged a bullet regarding that reduction, but we could have to focus on another problematic component – realizing appreciated assets upon death.
Under the current tax format, a step-up in cost basis is factored into the formula to determine the taxes on an asset that has been sold. Meaning, the beneficiary of inherited stock is not taxed on the gain since the initial purchase, rather, the gain that your inherited stock has grown since the death of the grantor.
Under President Biden’s proposal, there would not be a step-up in cost basis. Additionally, initial capital gains tax would be due upon death rather than at the eventual sale of the stock if inherited. This could pose a huge problem: owing tax on shares you have not sold and/or have no intention to sell. This rule will likely hit real estate assets as well. There may still be exemptions on primary residences, but investment property and other businesses might be fair game under the new proposal.
If passed, these changes will presumptively have accountants, lawyers, and advisors working overtime to find viable solutions around them, attempting to mitigate the tax burden. Strategic selling of assets, gifting of assets, or even basic life insurance planning could drastically help these burdens. If you find yourself in this situation or believe that your parents’ or grandparents’ generation may be impacted, please consult with an advisor to map out a strategy that works for you.
Bryan Miranda is a Financial Advisor of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately $1.8 billion in assets under management as of 02/22/21. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results.”