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Lack of Congress support for the proposal of a reduced estate tax exemption in Biden’s Build Back Better Plan means more tax reduction opportunities for retirees. Instead of being subject to a Federal Estate tax liability, you can focus more of your tax planning strategies toward reducing Federal income taxes, specifically via a step-up in basis at death.
Leveraging the current code: Presently, taxpayers have a roughly $12 million estate exemption per person. As such, a step-up in basis strategy can be utilized to help minimize capital gains taxes upon the sale of those appreciated assets. When an individual passes, the basis of the assets they owned is increased (stepped up) to the value as of the date of their death. However, this tactic can become complicated if assets are owned jointly with a spouse, as the death of one spouse can result in only a partial step-up (50 percent), for the surviving spouse.
Maximize your assets: Although this situation might muddy waters in the realm of tax planning, addressing the issue ahead of time can help you maximize the likelihood of a full step-up, simply by changing the title on your assets. For couples who live in separate property states, it’s possible to transfer all assets into the name of the spouse expected to pass first. In this instance, 100 percent of the assets would be included in their estate upon their death, and as a result, subject to a full step-up for the surviving spouse. At the same time, complications and exemptions can come along with this strategy, which is why projecting scenarios within your full tax and retirement plan before they arise is key.
Note the details: This is a long article and you might be aware of this tax planning opportunity, but pay close attention to that “Boomerang” rule. Tax planning is complex; however, being proactive can help save you big money.