Q: John wrote recently, “Dear Derek, I am hearing that under a Biden administration, he plans to remove an important advantage for retirees by removing the “step-up” in basis tax rule. How could that affect my wealth transfer plan going forward?
A: John, if Joe Biden officially becomes President, he has proposed to modify the laws around cost basis and it could have a direct effect on how you transfer your wealth in the future. The concept of the step-up in the basis of assets included in an individual’s estate has been a guiding principle in structuring estate plans since 1980 (when the carryover basis rule was repealed retroactive to 1976).
The basic planning advice is to gift high-basis assets during the donor’s lifetime, as the donee receives the donor’s basis in the gifted asset, and to retain low-basis assets so that the donor’s heirs receive those assets at death with a new stepped-up basis, equal to the fair market value of the asset as of the donor’s date of death. The donor’s heirs can turn around and sell the assets post-death without incurring any capital gains tax for the difference between the donor’s original basis and the fair market value of the assets at death. The Biden tax plan calls for the repeal of the stepped-up basis concept.