Several United States Senators, including Bernie Sanders and Elizabeth Warren, have proposed a bill, called the Sensible Taxation and Equity Promoted (STEP) Act.
STEP Act would allow individuals to exclude up to $1 million in unrealized capital gains from tax, which are the potential profits from an asset, as well as to pay the tax in installments over a 15-year period for capital gains that apply to any illiquid asset like a farm or business. See below for more details on how illiquid assets affect the process.
To better understand how the STEP Act works, here is an example: if someone dies holding $7 million in property for which they paid $4 million for, they would only pay taxes on $1 million of that $2 million gain. Additionally, if someone dies holding $3 million in property assets for which they paid $2 million for, none of that $1 million gain would be taxable.
Currently, it seems that assets held in a retirement account would not be subject to capital gain taxes under this Act.
Currently, it seems that gifts and bequests would be exempt from the capital gain taxes under this Act.
During an individual’s lifetime, any completed transfer to a trust or to any individual other than a spouse will allow for the first $100,000 of cumulative gain to be tax free. However, any excess will be subject to a transfer tax after the first $100,000. Second, this Act will eliminate the ability to use trusts to transfer property or sell other assets. Non-grantor trusts, which is a trust where the grantor retains certain powers over the trust, would have to report gain on all of their appreciated assets every 21 years. Third, this Act would require trusts more than $1 million of assets or more than $20,000 of gross income to provide additional information to the IRS, including a balance sheet, income statement, and list all trustees, grantors, and beneficiaries.
Items transferred to a spouses, charitable trusts, qualified disability trusts, charity, and cemetery trusts are exempt from the tax.
Illiquid property is property that is not easily sold. Common examples of illiquid property include businesses and farms. For STEP Act purposes, the law will affect transfers of illiquid property. Thus, property owners can pay the tax over a 15-year period. It would be interest only for up to 5 years and then 10 equal payments for the remaining 10 years. However, selling the property would require payment in full. KAASS LAW guides you through the STEP Act with expert legal advice tailored to your needs.
A particular focus of the STEP Act is the impact on illiquid assets such as:
Owners of such assets will be able to spread their capital gains tax liability over 15 years. This is a relief to those who own such businesses where the value of the assets may make it difficult to sell. This will allow owners of farms or businesses to avoid immediate tax consequences. Instead, they will be able to pay taxes gradually. This allows them to continue to operate their business or farm without serious financial hardship. However, when the asset is sold, the tax is paid in full. This also helps owners avoid asset sales that could result in the loss of the asset.
The STEP Act will provide owners with significant tax relief in the event of the death of the asset owner. It allows assets to pass without paying capital gains tax if they are worth less than $1 million. This innovation will be an important step in preserving family businesses and farms. It will allow for long-term succession planning without significant financial loss. It is important to note, however, that the transition to a 15-year capital gains tax system may present certain risks. If market conditions change or the owner's financial situation deteriorates, meeting tax obligations may become problematic. It is also important that asset owners properly plan and document all their transactions. This will help avoid potential legal exposure.
The STEP Act limits the use of trusts and other wealth transfer instruments. This may make it difficult to transfer assets between families or between businesses. It is important to consult with professional legal counsel to avoid tax liability issues.
To learn more about how the STEP Act may affect your tax situation, contact KAASS LAW. Our experienced attorneys can help you understand how the new laws may affect your assets and assist you in developing an effective tax planning strategy.
Did you know that a tax applies when someone transfers property after passing? This is typically called a death tax, where the estate pays taxes before transferring assets to the beneficiary.
Death taxes are taxes that are enforced by the federal and sometimes by the state government on someone’s estate upon their death. These taxes can be either charged on the beneficiary who receives the property in the deceased’s will or the estate which, pays the tax before transferring the inherited property. Essentially, the government taxes individuals on the right to transfer property to heirs after death. Therefore, that tax can be based on the total value of the decedent’s estate or the value of a single bequest.
The government charges estate tax based on the property and assets’ value at the time of the owner’s death. This tax typically applies only to amounts exceeding certain exemptions, not to the entire value of the estate. In 2020, the federal estate tax exemption was $11.58 million, based on the Tax Cut and Jobs Act. This will terminate in 2025 unless Congress decided to renew it. In the event Congress chooses not to renew, it will return back to $5 million. However, back in 2001, the estate tax exemption was $675,000. Thus, the estate's net value over that amount taxed at 55%.
Depending on what the exemption level is at the time of someone’s passing, the death tax may or may not be owed. For younger individuals who have not yet perhaps established their careers, the thought of owning millions seems impossible. However, with a long life ahead, the idea is not so unimaginable as to achieving financial success that is more than the estate tax exemption.
Taking steps now while the exemption is high is a great idea as to ensure financial security for beneficiaries. For example, placing shares of a successful business or real estate into a trust can shield them from the death tax. Take for instance setting up a domestic trust. This is an idea to consider because one can shield a portion of their assets from death taxes in this way. For example, Sally decides to open a new business that over time becomes worth $13 million. Sally should set up a revocable trust and place 45% of her business shares into this trust for tax protection. Upon Sally's death, she will only owe 55% of the business shares and avoid exceeding the exemption level. KAASS LAW can help you navigate death taxes and protect your estate.