U.S. Senators proposed the Sensible Taxation and Equity Promotion (STEP) Act in March of 2021. This act could change the taxation process on inherited assets, requiring millions of Americans to pay sizable taxes on their inherited legacies.
The STEP Act has not yet passed. However, many Americans have already begun preparing for its potential impacts on their finances and estates. Understanding the STEP Act and the effects it could have on your estate plan is essential to making proper preparations if Congress passes it.
Read on to learn more about the STEP Act and a few ways it could impact your estate planning process. If you have questions about its potential effect on your living trust or how inheritance taxes may affect your surviving spouse, be sure to consult a Florida estate lawyer. At the Law Offices of Sherri M. Stinson in Palm Harbour, FL, we can answer any questions you may have and help with other estate planning services.
Understanding the STEP Act
Today, when someone sells an asset for more than they paid for it, they must pay taxes in the form of capital gains on that asset. However, when a person passes away and leaves an asset to a family member, that asset is no longer taxable, even if the heir sells it the very next day for more than its acquired value.
This taxation loophole, known as the “stepped-up basis” loophole, is the problem that the STEP Act seeks to solve. If the STEP Act passes, it would require heirs to pay a transfer tax on any capital gains exceeding $1 million.
Let’s say that Ms. Smith inherits property worth $10 million from her father, Mr. Smith. When Mr. Smith acquired this property, it was only worth $5 million. However, because Mr. Smith never sold the property in his lifetime, he never paid taxes on the $5 million he gained as his property value increased.
Under the STEP Act, Ms. Smith would now pay capital taxes on the gains exceeding $1 million on this property. In her case, because the property has increased in value by $5 million since Mr. Smith acquired it, she would need to pay transfer taxes on $4 million of those gains.
In contrast, under the current system, Ms. Smith would not need to pay any capital gains taxes on her inherited property.
The STEP Act would also impact taxation in other ways. For example, this act could increase the corporate income tax rate and minimum tax, introduce a new Social Security payroll tax, and increase the tax rate for high-income filers.
If you have already established an estate plan and are planning to leave property to family members, the STEP Act could change the property value that your heirs receive. As a result, it is critical to revise your estate plan with the STEP Act in mind.
Three Ways the STEP Act Could Affect Your Estate Plan
1. The STEP Act Could Require Your Heirs to Pay Capital Gains Taxes on Inherited Property
If the property you are planning to leave to heirs has increased in value by more than $1 million since you acquired it, your heirs would need to pay capital gains taxes on the remaining gains under the STEP Act.
This tax rate could range from 0% to 20%, depending on the filer’s total taxable income. However, these taxes would decrease the actual value your heir will receive from your property in most cases.
2. The STEP Act Could Make it Too Expensive for Heirs to Keep Inherited Property
Let’s say that you have established in your estate plan that you want to leave all of your real estate to your children when you pass away. You’ve owned your property for decades now and want it to stay within the family after you pass on.
Understandably, your property has increased in value since you acquired it. Because your property value has increased by more than $1 million since you first bought it, your children will need to pay considerable capital gains taxes if they want to keep the house in their possession. In some cases, it may be more affordable for them to sell the property.
The STEP Act could prevent your children from fulfilling your wishes regarding your property after you die.
3. The STEP Act Could Impact Your Plan to Leave a Business to Heirs
If you own a business and are planning to pass it along to an heir after you die, the STEP Act could make this process very expensive for the heir. While your business property and supplies may be of high value, your business as a whole may be struggling to keep up with high expenses.
Under the STEP Act, the heir would need to pay capital gains taxes on any business property that has increased in value by more than $1 million since you acquired it. This tax rate could cut into the new business owner’s profits, making it more challenging to keep the business alive.
Altogether, the STEP Act could create considerable changes to many Florida residents’ estate plans. If you have not reviewed your estate plan in a while or are looking to create a new one, it’s essential to keep the STEP Act in mind as you establish your plans for the future. An “estate attorney near me” can help.
Law Offices of Sherri M. Stinson, P.A.: Estate Planning, Simplified
At the Law Offices of Sherri M. Stinson in Palm Harbour, FL, we have extensive experience helping clients navigate the estate planning process. We strive to make every client feel valued and heard today and for the rest of their lives.
If you’re looking for an “estate planning attorney near me,” we at the Law Offices of Sherri M. Stinson in Palm Harbour, FL, can help. Contact us at 727-361-9302 or complete our online form today to learn more about the STEP Act and start the process of adjusting your estate plan accordingly.
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