Tag Archives: Estate Tax

Estate Planning for a Single Person

Posted on by

If you are single, you may not think you need to plan your estate, but single people are in as much need of a plan as anyone else. Estate planning not only involves determining where your assets will go when you die — it also helps you plan for what will happen should you become incapacitated, perhaps as the result of a stroke, dementia, or injury. If you don’t make a plan, you will have no say in what happens to you or your assets.

Without a properly executed will in place when you die, your estate will be distributed according to state law. If you are single, most states provide that your estate will go to your children, parents, or other living relatives. If you have absolutely no living relatives, then your estate will go to the state. This may not be what you want to have happen to your assets. You may have charities, close friends, or particular relatives that you want to provide for after your death.

If you become incapacitated without any planning, a court will have to determine who will have the authority to handle your finances and make health care decisions for you. The court may not choose the person you would have chosen. In addition, going to court to set up a guardianship is time-consuming and expensive. With proper planning, you can execute a power of attorney and a health care proxy, which gives the people you choose the authority to act on your behalf, as well as an advance directive giving instructions on what type of care you would like. The power of attorney can also dictate exactly what powers the individual has.

Single individuals who are divorced need to make especially certain that the beneficiary designations on their IRAs, life insurance policies, and relevant bank accounts are up to date. If you don’t, your ex-spouse could get the funds. And for single people of means, opportunities to avoid state or federal estate taxes can be more limited than for married couples, although advance planning can close the gap.

In short, proper planning is a good idea for everyone. Contact your attorney to help you create an estate plan.

Biden Administration May Spell Changes to Estate Tax and Stepped-Up Basis Rule

Posted on by

A new administration usually means that tax code changes are coming. While it remains unclear exactly what tax changes President Biden’s administration will usher in, two possibilities are that it will propose lowering the estate tax exemption and eliminating the stepped-up basis on death. The first would affect only multi-millionaires, but the second could have an impact on more modest estates and their heirs.

In 2017, Republicans in Congress and President Trump doubled the federal estate tax exemption and indexed it for inflation. For the 2021 tax year, the exemption is $11.7 million for individuals and $23.4 million for couples. As long as your estate is valued at under the exemption amount, it will not pay any federal estate taxes, and the vast majority of estates do not owe any tax. President Biden has expressed an interest in lowering the estate tax exemption. It could be more than halved to $5 million or even reduced to the previous exemption of $3.5 million for individuals.

Another possible tax change is to how property is valued when it is passed on at death. “Cost basis” is the monetary value of an item for tax purposes. When determining whether a capital gains tax is owed on property, the basis is used to determine whether an asset has increased or decreased in value. For example, if you purchase a stock for $10,000, that is the cost basis. If you later sell it for $50,000, you will have to pay taxes on the $40,000 increase in value.

Under current law, when a property owner dies, the cost basis of the property is “stepped up.” This means the current value of the property becomes the basis. For example, suppose you inherit a house that was purchased years ago for $50,000 and it is now worth $250,000. You will receive a step up from the original cost basis from $50,000 to $250,000. If you sell the property right away, you will not owe any capital gains taxes.

According to an article in the New York Times, the current administration may propose to eliminate the basis step-up rule. In the past it was difficult to determine the original cost basis of some property, but in the digital age that information is more easily gathered. The change could result in tax increases for some people inheriting property that has risen significantly in value.

Another question is whether either of these changes will be made retroactively. It is unlikely, but possible, that if Congress changes these rules later in the year, they could be made retroactive to the first of the year.

If you are concerned about these rules changing, a trust may be a good way to protect your estate. Property in a trust passes outside of probate, and there are specific types of trusts that are designed to protect assets against estate taxes and capital gains. Talk to your attorney to determine if a trust is right for you.

Tax experts agree that while changes to the tax code are likely, they probably won’t happen right away. The coronavirus pandemic and the recession it has triggered mean that Congress has other priorities at the moment.