In March 2021, Chris Van Hollen and four other Democratic senators introduced the STEP (Sensible Taxation and Equity Promotion) Act. From their perspective, the STEP Act should promote equity and reduce wealth disparity in American society by eliminating the step-up in basis of assets upon the death of the owner.
What exactly does the STEP Act propose, and how could it affect estate planning for senior citizens in Ohio? The legal team of Jarvis Law Office explains.
Understanding the Step-Up in Basis
The “basis” of an asset is its value for tax purposes. In most cases, the basis is the price paid for the asset. For example, if Mr. Smith bought a rental property in 1960 for $20,000 and made no improvements on the property, the basis of the house is $20,000. If Mr. Smith sells the property for $200,000, he would have to pay tax on the gain of $180,000 increase in value. However, under current law, if the property is not sold but is passed on to Mr. Smith’s heirs when he dies, the basis of the rental property increases (steps up) to the fair market value of the property on the date of Mr. Smith’s death. This is the step-up in basis. If that new basis is $200,000, the heirs will only be taxed on any gain from a sale of the property that exceeds $200,000. If the heirs sell the property for $200,000, there is no taxable gain. This means that the $180,000 over the $20,000 purchase price, referred to as unrealized gain, is never taxed. The STEP Act would change this.
How the STEP Act Would Change Taxation of Unrealized Capital Gain
The STEP Act would eliminate the step-up in basis, thereby taxing unrealized capital gains. Not all the unrealized gain would be taxed, however. Under the proposed law, there is an exemption of up to $1 million of the unrealized capital gain. Thus, if Mr. Smith has assets with a $1 million basis and a total fair market value of $4 million on the date of his death, under the STEP Act, $2 million ($4 million value on date of death minus the $1 million exemption as well as the $1 million basis) of the unrealized capital gain would be subject to tax.
Will the STEP Act Only Affect Wealthy People?
While the supporters of the STEP Act declare that its purpose is promoting social justice and reducing wealth gaps, the act in its current form has elicited considerable criticism.
With the climb in real estate prices, an exemption of $1 million in unrealized capital gains isn’t enough to limit the influence of the STEP Act to ultra-wealthy families alone. Small businesses, including farms, would be subject to burdensome taxation, even if they remain in the family. Thus, the heirs would have to pay a heavy transfer tax just for retaining the family farm – something that many of them would not be able to afford.
What Does the STEP Act Mean for Your Estate Planning?
So far, the STEP Act has not passed as a law, and it is difficult to predict the final form of the new tax regulations. However, it appears that the Biden administration is pushing for a tax reform that may have a heavy impact on some American families.
It is natural to feel uncertainty in the face of estate tax changes. To address your concerns and develop a workable plan, be sure to consult a reliable trust and estate attorney with experience in Ohio property transfer laws.
Jarvis Law Office: Protecting What’s Most Important to You
As people age, preserving personal dignity and financial control becomes a primary concern. Don’t leave asset protection to chance – be sure to consult a reliable trust and estate attorney today and create a safety net for yourself and your family. With offices in Lancaster, Dublin, and St. Clairsville, the Jarvis Law Office team assists clients with estate planning services such as drawing up powers of attorney and setting up trusts. We also provide a roadmap for the rest of our clients’ lives and protection for their beneficiaries. At Jarvis Law Office, we focus on protecting seniors and their families. Contact us today to see if you qualify for a no-cost consultation. We can counsel you over Zoom or meet with you in one of our offices:
- Lancaster: (740) 653-3450
- Dublin: (614) 495-4185
- St. Clairsville: (740) 699-2193
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904 N. Columbus Street
Lancaster, OH 43130