From NYT,
Not clear what they mean; Do they mean the estate will pay CG tax at death whether it’s sold or not?
It will never pass. Family farms would be wiped out. Farms and businesses would have to be sold to pay the taxes as so many are asset rich but cash poor.
^That will be stupid. But if they don’t tax at bequest and just not allow step-up, it’s possible. I would still question if we get anything for the complexity it creates. What fraction of stocks are kept so long that it makes a big difference? That should be easy to verify. If most stock holdings in most estates are less a few years, the proposal mainly affects small businesses and family farms. Not what you think of when you hear “trust loop holes”
Good points Igloo. Also not who one thinks of as the ‘filthy rich’. (Family farms, small businesses, owners of rental properties, etc.).
Another rationale for step-up basis is that sometimes finding or determining the true basis of an inherited asset is nearly impossible, due to poor record keeping by the original owner. I just helped my mom sell her house - she had no documentation of capital improvements; luckily the selling price was under $500k, so she will just take the exemption and be happy in her new rental apartment.
Consensus seems to be that the proposals are unlikely to pass any time soon, but once they’re on the table it’s hard not to look at them. I don’t have statistics, but in my mom’s social circle almost all real estate is held by widows who are eligible for a $250,000 exemption. In California that often leaves a sizable chunk subject to capital gains tax. They can’t move unless the county they live in allows them to transfer their low property tax to their new residence because they can’t afford higher property taxes. If the proposed changes are on the horizon it could make people more conscientious about offsetting losing investments with ones that have appreciated. It might also make sense for a Trustee to begin selling highly appreciated holdings in order to spread out the gains and avoid getting bumped into the next higher tax bracket. There are middle class families who have embraced a “buy and hold” mentality for generations. They are not among the wealthy elite, but were responsible enough to maintain a safety net for themselves.
Unless the law has changed in the past decades, it was only a once in a lifetime $250K/$500K exemption when you sold R/E you had lived in in for 3 of the last 5 years prior to the sale. It would be nice if the exemption applied more than once a lifetime per person, but I can see how that could be abused.
Once in a lifetime is gone:
Wow, thanks! Guess I never paid attention. It might be worthwhile to move every two years and sell off property if you want to avoid your heirs having a huge capital gain. Sadly, we hate moving!
Lots of HI properties have high appreciation over the owners’ lives, but their kids can’t easily divide it up to sell. They often end up selling the property as it is the major portion of the estate, but if the death makes the capital gain immediately due and payable, there will likely be more rushed estate sales.
I think much can be done to curb abuses, short of the radical moves being proposed. These proposals can easily hurt families whose sole major asset is a home and/or modest investments.
What is the usual fee for an attorney to handle estate/probate etc matters? Is it usually a percentage of the estate?
I agree, if the step-up basis for inherited assets is eliminated, it would be a huge blow for wealth transfer.
I also doubt that the Republican House and Senate would let it past their gates. But, given that the attention being paid to wealth accumulation by the top 1% is reaching media saturation, the proposal will receive more discussion and attention, and the upper-middle class and “merely” wealthy will be swept up with the mega-millionaires and billionaires.
Up thread, I had alluded to the conflict between the goal of taking advantage of step-up basis (by keeping appreciated assets in your estate at the risk of exceeding the $10.86 million lifetime exemption but your heirs get the free step up in basis when they inherited then sell) vs. transferring assets that will appreciate OUT of your estate ASAP (to keep your estate below the $10.86 million by letting the value grow outside the estate) and avoiding the 40% estate tax on the excess estate value. So, it appears to be a contest between estate tax and the long-term capital tax rate (which is inching higher for high-income taxpayers already).
Most of us won’t have the problem of exceeding the lifetime exclusion. However, I had hoped to pass on the most highly appreciated assets (won’t be our house) to our child when we do the estate plan.
In my experience, it can be a flat rate (for "standard wills and trusts). But most likely you’d need the expertise of someone who isn’t trying to sell you a will or trust agreement on a one-size-fits-all basis. In that case, it would be an hourly rate for an Estate Planning or Wills & Trust lawyer. In your state, you should look for someone who is “board certified” if your state bar has that section of board certification. The two board-certified counsel I’ve dealt with bill at $400-$680 per hour.
It can get expensive, but may be worth the investment if you are talking about significant assets and avoiding mistakes.
My ILs, who tried to do things properly, got an ill-drafted living trust agreement that was marketed as an “avoid probate” document by their local general practitioner attorney. It had contradictory residual clauses for disposition, so that was a mess for their almost-simultaneous death. The trust also had a “pour over” provision for all of their retirement accounts, which already had designated beneficiaries in place at the mutual fund companies. So that was another complication. We had to obtain legal counsel for help in interpretation and disclaimers Fortunately, where the document was not clear, the beneficiaries (small family) were able to agree among themselves to sort things out. And then there’s me, the pro bono lawyer who did most of the leg work instead of using the pricey lawyer for day-to-day administration.
So, my advice is to know what you want to do first (if at all possible) before you consult with counsel.
I’m looking more on what attorneys charge to handle the estate of someone who is deceased and has a will. Need an attorney to handle matters as it is out of state for us and would prefer to have someone local to where the properties, holding and residency of the deceased are.
Then, I imagine you should get quotes but I have read that it is sometimes done on a percentage basis, for example 5% of the recovered estate value if there are assets that have to be liquidated.
Estate administration is what you are looking for.
Here’s what the California code appears to say (it’s pretty significant). By my calculation it would be $33,000 for an estate of $2 Million, which would not be hard to have with a house in coastal California plus some investments.
- (a) Subject to the provisions of this part, for ordinary services the attorney for the personal representative shall receive compensation based on the value of the estate accounted for by the personal representative, as follows: (1) Four percent on the first one hundred thousand dollars ($100,000). (2) Three percent on the next one hundred thousand dollars ($100,000). (3) Two percent on the next eight hundred thousand dollars ($800,000). (4) One percent on the next nine million dollars ($9,000,000). (5) One-half of 1 percent on the next fifteen million dollars ($15,000,000). (6) For all amounts above twenty-five million dollars ($25,000,000), a reasonable amount to be determined by the court. (b) For the purposes of this section, the value of the estate accounted for by the personal representative is the total amount of the appraisal of property in the inventory, plus gains over the appraisal value on sales, plus receipts, less losses from the appraisal value on sales, without reference to encumbrances or other obligations on estate property.
We had the stepped up basis rules at death in 2010. The world did not collapse. The owner of the Yankees died that year and his estate had to pay the cap gains taxes.
This hits the wealthy, and depending on the tax free element, the upper middle class. The middle class doesn’t have much wealth and they may be exempt anyway.
Right now, some of this wealth is never taxed at all.
If I own a a property with a basis of $100,000 and it is worth $1,000,000…
If I sell while alive, I owe capital gains taxes on $900,000.
If I die before I sell, the basis is $1,000,000 so if the heirs sold the property at $1,000,000, the heirs would owe nothing in capital gains taxes.
That seems a little odd…
My parents own a place with similar numbers. We aren’t selling the place because they are alive and would take the cap gains tax hit. After they die, there won’t be a hit.
I am in the process of filling out the Transfer on Death form for our mutual fund accounts, I would like to ask a dumb question. If it is a joint account (me and H), if I want to designate my children as beneficiaries, will they be the “primary” beneficiaries with designated %? And me or my H will not be the primary beneficiary should one of us go because the account is a joint account, am I correct? Thanks.
Yes you are right, if the account is in joint tenancy with right of survivorship it will pass to either surviving spouse first and the beneficiary designations will apply when the second owner passes. Definitely not a dumb question, some of the financial rules are very obscure.
A few small tips:
- Older folks may have several small, old insurance policies. Make sure you know where these are.
- Some people may have a bunch of stock certificates in a safe deposit box. Try to persuade them to put these into a brokerage account before they die. If they don’t, it will be a big hassle dealing with them in the estate. (We just barely dodged this bullet.)
- I’d be very surprised if the stepped-up basis goes away any time soon. However, if you have a bunch of appreciated stocks, one thing you can do is use them to make any substantial charitable gifts while you are alive. You deduct the current value of the asset, and nobody pays tax on the gain. (Note: if you give the stocks to a family member while you are still alive, they take them with your basis.)
Single, elderly relative in Florida has 3 adult children (none live in her state), an estate less than $1 million, owns a small condo, owns some property in two different states. Has some debts that will need to be settled. She apparently will not get a will because “she doesn’t want her assets to go into probate.”
How much of an administrative problem will it be for her children if she dies intestate? I think the children have a good relationship between themselves and there is not likely to be in-fighting. But they are concerned about the headaches of administration. Any steps they should take now, if their mom won’t do a will?