NEW YORK (MainStreet) – It's about to get a lot more difficult to inherit a tax-free fortune. That doesn't mean it isn't possible.
In his State of the Union Address last month, President Barack Obama proposed ending the “step up” provision in the capital gains tax — which basically shields those getting an inheritance from capital gains accrued by those leaving money or property behind. Under the president's proposal, that provision would be eliminated entirely and expose those left behind to more tax liabilities.
“It would make it much harder to shield assets from taxes,” says Jason D. Smolen of the Vienna-based SmolenPlevy law firm, describing the wide-ranging effects the change would bring to many families. "To do so would require a great deal more planning, and help from estate attorneys and accountants.”
While the President says the closing of what he calls “the trust fund loophole” will ensure that the wealthiest Americans pay their fair share on inherited assets, Smolen says that term is a bit of a misnomer. He also notes that the proposal would affect more than just the rich, as any beneficiary would have to look up the original cost of just about any asset they inherit. It will not only cost them a chunk of their inheritance, but also a lot of time and money just sorting out the financial details.Read More: Why Your Estate Planning Should Include Your Facebook Page As Well
Let's say, as Smolen does, that you bought GE stock 15 years ago for $500. If, at the time of your death, that stock is worth $2,500, that's a gain of $2,000 that you haven’t paid tax on. Currently, if you leave those shares to one of your children, their cost basis would be $2,500. That means that whenever your child sells the stock, he or she will only owe tax on capital gains that build up over her $2,500 cost basis. Under Obama’s proposal, however, any capital gains over $500 would be taxed.