Understanding the Impacts of President Trump’s “Big Beautiful Bill” on Federal Estate Taxes
On July 4, President Trump enacted the “Big Beautiful Bill” (BBB), a significant piece of legislation that clarifies the landscape of federal estate taxes. For many individuals and families, this bill brings not only certainty but also strategic opportunities concerning wealth transfer.
Changes to the Federal Estate Tax Exemption
Prior to the BBB, the federal estate tax exemption was set to revert from $13.99 million to just over $7 million on January 1. This sudden reduction would have affected a considerable number of estates, potentially leading to higher taxes for beneficiaries. However, with the new legislation, the exemption will rise to $15 million by 2026 and will be adjusted for inflation in future years.
For married couples, this means an impressive $30 million can be transferred to heirs without incurring federal estate taxes, provided the appropriate estate tax returns are filed.
What Does This Mean for You?
Historically, individuals often rushed to transfer assets or placed them in irrevocable trusts to minimize estate tax liability. However, for most people today, unless you are extremely wealthy or a significant reduction occurs in 2029, your estate is unlikely to face federal estate taxes.
In fact, 99% of individuals are now better off retaining assets titled in their names or within revocable trusts. This strategy aligns with federal laws that offer a favorable “step-up in basis” for capital gains tax purposes at the time of death.
What is the Step-Up in Basis?
To understand the benefits of the step-up in basis, consider this scenario: You purchased 100 shares of Apple stock for $10 each. If you sold those shares today for $200, you would owe capital gains tax on the $190 profit per share.
However, if you hold the stock until your death, your beneficiaries receive a new tax basis equal to the stock’s value on the date of your death, eliminating capital gains taxes accumulated from the original purchase price to your death.
The Risks of Selling Appreciated Assets
Many people mistakenly sell highly appreciated assets before death, incurring substantial capital gains taxes. For example, consider a 90-year-old who bought a house for $200,000 in the 1970s. If that property is sold for $4.25 million today, it incurs significant capital gains taxes that would be avoided if the property were bequeathed instead.
Alternatives to Selling: Raise Cash While Minimizing Taxes
Rather than sell appreciated assets to generate cash, consider these alternatives:
- Mortgage the Property: Leverage the equity in your home while retaining ownership.
- Rent the Property: This generates income without incurring capital gains tax.
- Borrow from Family: Seek support from children for living expenses, thereby preserving the asset.
Gifting vs. Inheriting: The Tax Implications
Another challenge arises when gifting appreciated assets to children. Using the Apple stock example again, if you gift shares valued at $225 today, your kids would incur taxes based on your original $10 basis when they eventually sell. If you bequeath those shares instead, they benefit from a stepped-up basis at the time of your passing.
Navigating the Future: Focus on Capital Gains Tax
With the BBB establishing a $15 million estate tax exemption, the immediate concern for most individuals is less about estate taxes and more about capital gains taxes. Before making any significant financial decisions regarding assets, consider the implications on tax liability.
Your beneficiaries will appreciate your foresight in navigating the complexities of taxes, ultimately preserving their inheritance.
About the Author
Attorney Joseph M. Pankowski Jr. is a partner at Wofsey, Rosen, Kweskin & Kuriansky LLP, located in Stamford. With an extensive background in estate planning, he is committed to helping clients navigate the intricacies of federal laws and tax implications.
For personalized advice, consult a qualified attorney to understand your unique situation better.
