Paul L. Caron

Monday, January 18, 2021

NY Times: Biden May Eliminate Step-Up In Basis At Death, Hurting Jeff Bezos, Elon Musk, And Efforts To Close The Black Wealth Gap

New York Times Wealth Matters:  The Estate Tax May Change Under Biden, Affecting Far More People, by Paul Sullivan:

What happens once Mr. Biden can begin enacting changes to tax policy? ... [P]erhaps the best way to consider what to do in 2021 is to think about what you need to do in the short, medium and long term. There’s a lot to think about, so I’m going to break this topic into two columns. This week, I’m going to look at long-term issues; next week, I’ll get into the more immediate tax issues that could bubble up this year.

The biggest potential long-term change involves the estate tax. But in contrast to previous changes, the tax code could be modified in a way that affects everyone who has something of value to leave to heirs.

For decades, assets were valued at the time of the owner’s death, even if the value had risen. This so-called step-up in basis rule works like this: If a stock that was bought for $1 is worth $10 when the owner dies, the gain is $9. But when that asset is passed on to heirs, the embedded gain is wiped out because the base value is now $10 and no capital gains tax is owed.

This treatment applies to any asset, from liquid securities and private investment partnerships to a family home. If the total value of the estate is less than the current $11.7 million exemption level for an individual or $23.4 million for a couple, then no estate tax would need to be paid, either.

A Biden administration may move to change this for logical and revenue reasons. At one point, the step-up in basis made sense. Imagine trying to determine the capital gains from AT&T stock that your grandmother bought in 1943 when record-keeping was done with a pencil and paper. Today, cost-basis information can be retrieved in seconds.

But two different groups of people have raised concerns about losing the step-up loophole: the very wealthy and the moderately wealthy.

If you’re Jeff Bezos or Elon Musk, the two richest people in the world, having your long-term holdings in Amazon and Tesla given a step-up in basis is a huge savings on capital gains tax, because they’re going to be paying estate tax regardless.

But for people of more modest wealth, say someone lucky enough to inherit a home or a stock portfolio, the loss of step-up could be even more significant. ...

For the Black community, the prospect of an heir’s paying capital gains tax on inherited property could contribute to maintaining the racial wealth gap, said Calvin Williams Jr., chief executive and founder of Freeman Capital.

He noted that the average Black family passed on $38,000 to heirs, while the average white family passed on $140,000. The loss of the step-up in basis would have an even greater impact on efforts to close the Black wealth gap, Mr. Williams said.

“We need every single dime to make that transfer,” he said. “I understand and appreciate what they’re trying to do, but it’s a pretty wide hammer right now. If it were more narrowly focused, that would be more advantageous for communities.” ...

With Democrats controlling the legislative and executive branches, there is concern that the exemption level could drop to $5 million or even $3.5 million, where it was when President Barack Obama took office. (The current level, which was set in the 2017 tax overhaul, is expected to sunset in 2025.) For the wealthiest in the country, the bigger concern is the rate itself. It’s now at 40 percent, but it was as high as 55 percent in 2001.

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