January 22, 2015   Estate Planning

State of the Union Proposals Could Impact Your Estate Plan


By Matthew T. McClintock, J.D.
Vice President, Education, WealthCounsel

In his 2015 State of the Union Address, President Barack Obama proposed a major change to the tax treatment of inherited assets that could impact many estate plans. 

Under the president’s plan, the step-up basis rule for capital gains—pejoratively referred to as the “trust fund loophole”—would end. Currently, capital gains taxes owed on assets held at death essentially disappear. 

For example, assume you buy stock worth $100. The stock does great and grows to $1 million by the time of your death. Under current law, all of that capital gain – that is, $999,900 of gain – is eliminated and not taxed when your heirs sell the stock after your death. 

According to the Congressional Budget Office, the step-up in basis rule will cost the government 0.3 percent of GDP over the next decade. The President’s proposal would require that a decedent’s capital gains tax basis is “carried over” to heirs, requiring heirs to pay much higher capital gains taxes on inherited items. However, certain exemptions would apply for couples, family-owned businesses and certain inherited items, such as furniture, clothing, homes and other heirlooms. 

During the State of the Union Address, the president also said he would like to raise the top capital gains rate. 

It’s important to bear in mind that unless there is some baseline capital gains tax exemption in effect, a change in the basis adjustment rules would impact many middle class families; it will not just punish the mega-wealthy. While it’s impossible to know whether these proposals will become law in the future, the president’s speech should serve as a reminder to all consumers that it’s essential to have a comprehensive, up-to-date estate plan in place, and to have that plan thoroughly reviewed periodically by competent legal counsel. Every plan should include, at minimum, these elements:

  • A will or trust that has been professionally reviewed within the last two years. 
  • A current durable health care power of attorney that permits the person of your choosing (spouse, child, other family member) to make health care decisions for you in the event you are unable to do so.
  • An estate plan that will:
    • Minimize possible income, gift, and estate tax liability during your life and at your death. 
    • Avoid possible will contests and disputes during the administration of your estate.
    • Protect the assets you leave behind for your surviving spouse and/or children.
    • Name suitable guardians for any minor children in your care.
    • Protect your children’s inheritance in the event your surviving spouse chooses to remarry. 

If you need to start or update your estate plan, click here to find a planning professional near you. 

 

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