Eleanor, a fictitious 95-year-old widow, recently passed away. Eleanor’s Last Will and Testament provided that her three children – Lawrence, Heidi and Roger – were to equally share in the assets of her estate. Eleanor’s estate included a house that she had purchased in Seattle in 1952 for $10,000 which is currently valued at $910,000. In addition, she had 5,000 shares of IBM stock that she and her husband Fred had purchased in 1962 for $11.75 per share and is now valued at $135.73 per share. During Eleanor’s probate, the Personal Representative sold Eleanor’s home – achieving a gain of $800,000 after the costs of sale were paid. Then the Personal Representative sold the IBM stock – achieving a gain of $600,000 after paying fees associated with the sale. If Eleanor had sold these assets while she was alive, she would have paid taxes on these transactions. But, since her estate sold the assets as part of Eleanor’s probate, the estate did not have to pay taxes on these transactions which increased the inheritance amounts received by Lawrence, Heidi and Roger. As this April 11, 2021 Dallas Morning News article reports, “[u]nder current law, when someone dies, the beneficiaries of his or her estate take their inheritance at a stepped-up basis. No capital gains are realized and no taxes on capital gains are due.”
However, this long standing rule may change in 2021. Senators Chris Van Hollen (D-Md.), Cory Booker (D-N.J.), Shelton Whitehouse (D. R.I.), Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have introduced the Sensible Taxation and Equity Promotion (STEP) Act to close what Senator Sanders labels as “one of the most egregious tax loopholes in our code today.”
What about Eleanor? If the STEP Act had been enacted prior to her passing, according to the explanation of the bill provided by Senator Van Hollen, “The exclusion for sales of a principal residence of $250,000 ($500,000 if married) would apply to property treated as sold under the bill.” So Eleanor’s estate would be required to pay tax related to the sale of the house. In addition, the STEP Act “[p]rovides individuals with a $1,000,000 exclusion from taxation under this bill for unrealized gains at death.” Eleanor’s estate experienced $1.4 million in gain, so her estate would not be exempt under the STEP Act.
Is this proposed legislation fair? Is it fair, for example, that an elderly person who has owned a home in Seattle for many years, with our dramatically escalating real estate prices, is subject to tax when passing on this asset to her children at her death? Stay tuned, because this proposal will undoubtedly be fiercely debated in the coming months.
This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.