President Trump’s self-titled “Big Beautiful Bill,” signed July 4, has finally brought some certainty to the imposition of federal estate taxes.
Joseph M. Pankowski
Prior to this legislation, the 2017 estate tax law was scheduled to sunset on Jan. 1. Had that occurred, the current $13.99 million exemption — the amount that escapes the imposition of federal estate taxes at a person’s death — would have dropped to just over $7 million next year.
Thanks to the BBB, the exemption will be raised to $15 million in 2026, and will be subject to future inflation adjustments. For married couples, $30 million may be passed to beneficiaries, with the proper filing of estate tax returns.
What does this mean?
In previous years, people would be encouraged to give away assets, or place them in irrevocable trusts to avoid estate taxes.
Today, however, unless you are extremely wealthy, or there is a political tsunami that results in the reduction of the estate tax exemption in 2029 or later, your executor will not have to pay a federal estate tax after your death.
Indeed, at this juncture, 99% of us are far better off dying with assets titled in our own names, or in revocable trusts. This is due to a long-standing federal law, which provides for a step-up in basis for capital gains tax purposes.
What is the step-up in basis?
Imagine you bought 100 shares of Apple stock for $10 a share back in the day. The $10 is, of course, your basis for capital gains tax purposes for each share.
If you sold it now for $200 a share, you’d pay a sizable capital gains tax.
However, should you own the stock at your death, your estate would receive a step-up in basis, meaning that the stock is revalued for capital gains tax purposes on the date of your death.
Your beneficiaries would receive your Apple stock with a new stepped-up basis, eliminating the capital gain from the moment of purchase to the day of your death.
The problem? Many people sell their highly-appreciated assets before they die and incur significant capital gains taxes.
For example, consider a 90-year-old person who purchased a house on Long Island Sound in the 1970s for $200,000, but now is short on cash. His or her basis in the property — including, say, $150,000 of capital improvements made over the years — is $350,000.
If the house is sold for $4.25 million, the federal government and the state of Connecticut will pocket massive capital gains taxes — taxes they wouldn’t be entitled to if the person died owning the property.
What could this person do differently to raise cash?
Don’t sell while alive! Put a mortgage on the house. Find a tenant and rent the property. Borrow funds from the children to take care of living expenses.
Anything other than selling the house would be better from a tax perspective.
A similar problem arises when parents gift highly-appreciated assets to their children.
Go back to the Apple example. If you give the Apple stock to your children during your lifetime, they take your $10 basis in the stock. Then, when they sell it for $225 a share in 2026, they’re hit with massive capital gains taxes.
However, if you simply waited until you died and then bequeathed the stock, your children would have inherited the stock free of capital gains taxes.
Thus, in the BBB era of a $15 million estate tax exemption, you can probably forget about federal estate taxes in the near term. Instead, keep your eyes on the capital gains tax implications of selling or gifting highly appreciated assets.
Your beneficiaries will thank you.
Attorney Joseph M. Pankowski Jr. is a partner with the Stamford-based law firm Wofsey, Rosen, Kweskin & Kuriansky LLP.
