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STEP Act 99.5% Act

Proposed Legislation on Inherited Assets and Taxation of Estates

Currently, when a beneficiary inherits an asset, the cost basis of that property is “stepped-up” to the value of the asset as of the decedent’s date of death. This means that the beneficiary would pay a capital gain tax on the difference between the sale amount and the stepped-up basis amount. Accordingly, if the asset is sold shortly after the decedent’s passing, the capital gains would be minimal, if any.

STEP Act

The Sensible Taxation and Equity Promotion (STEP) Act, proposed by Senators Sanders, Warren, Whitehouse, Booker, and Van Hook, would eliminate the step-up in cost basis that a beneficiary receives when he or she inherits an asset and would be effective retroactively to January 1, 2021. Therefore, the beneficiary would be required to pay tax on all previously untaxed gains. However, any taxes paid under the STEP Act would be deductible from the estate tax.

The STEP Act would permit a one-time exclusion of up to $1 million of inherited capital gains. Also, if a beneficiary were to inherit an illiquid asset, such as a farm or business, the taxes could be paid in installments over a 15-year period.

A $1 million exclusion will assist a lot of families. However, if the decedent held real estate or securities for a long period of time before his or her passing, he or she may have over $1 million in unrealized capital gains. In some cases, this will result in beneficiaries having to liquidate assets that they inherit in order to pay these capital gains taxes.

99.5% Act

Another proposal is the 99.5% Act, proposed by Senator Sanders. The 99.5% Act would reduce the federal estate tax exemption from $11.7 million for individuals ($23.4 million for couples) to $3.5 million for individuals ($7 million for couples). This means that an estate valued at under $3.5 million will not need to pay estate taxes at the federal level; however, an estate valued over $3.5 million will be subject to increasing federal estate tax rates ranging from 45% to 65%. Currently, the federal estate tax rate is 40% for all estates over the federal exemption amount, so this will be a significant increase in federal estate tax liability for many estates. However, no matter the value of the estate, the estate will still be subject to estate income tax liability.

The 99.5% Act also proposes to reduce the unified gift exemption from $11.7 million to $1 million per lifetime; however, individuals will still be permitted to give away $15,000 a year without the gift counting toward the lifetime limit.

Here to Help

Accordingly, if these proposals pass, it is imperative that you keep detailed records on your cost basis information for all of your assets. This can be an overwhelming endeavor; however, we at Russo Law Group, P.C. are happy to assist you and discuss your estate planning strategies to help minimize these proposed taxes.

Katie Trotta

Katie Ann Trotta

Russo Law Group, P.C.
100 Quentin Roosevelt Blvd., Suite 102
Garden City, NY 11530
516-683-1717 Ext. 2142

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