Explain the law on reasonable taxation and promotion of fairness
Senators Chris Van Hollen, Cory Booker, Bernie Sanders, Sheldon Whitehouse and Elizabeth Warren recently introduced the Sensible Taxation and Equity Promotion (STEP) law, which at first glance seems complicated, so let’s see if we can break it down.
American workers pay taxes on their income every year, but income tax (according to some lawmakers) is more optional for wealthier families, whose income often comes from their wealth rather than work-related income. Income from wealth accumulation is supposed to be taxed as capital gains when a person sells an asset for more than what they paid for, but when a person dies with assets that have increased in value. during its lifetime, income taxes are never levied on these capital gains. This is called a “reinforced base”.
The STEP law is a law that aims to fill this perceived loophole by taxing unrealized capital gains when heirs inherit assets on which the original owners never paid income tax.
The Act proposes to tax any transfer of ownership, either during life or upon death, that involves a net gain associated with the transfer. At death, the first million dollars of gain are excluded. However, over the course of life, any transfer made to a trust or to an individual other than a spouse or charity will allow the first $ 100,000 of cumulative gain to be tax-free. After this amount, any excess will be subject to a transfer tax. (The $ 1 million exclusion would be reduced by any amount used over the lifetime.)
It is called a transfer tax because the tax will be due on a transfer of ownership. This includes transfers to trusts that would not be included in the transferor’s estate, including an intentionally defective transferor trust. These trusts are very popular because people can transfer assets from their estate without having to pay income tax if the assets are sold to the trust. The STEP law would minimize the benefits of using these trusts. Transfers to a revocable trust (including a living trust) would not be subject to this transfer tax.
In addition, all non-grantor trusts should report gains on all of their appreciated assets every 21 years. Any trust formed before 2005 would automatically report this gain in 2026. Trusts with more than $ 1 million in assets or more than $ 20,000 in gross income would now be required to provide a balance sheet, income statement and list. from all trustees, assignors and beneficiaries to the IRS.
Items transferred to a charity, spouses, charitable trusts, qualifying disability trusts and cemetery trusts are exempt from tax. Gains on a personal residence would be exempt up to $ 250,000 or $ 500,000 for a married couple.
Ultimately, any transfer tax due upon death would reduce the value of the estate subject to inheritance tax. This transfer tax would apply to any gift or inheritance after December 31, 2020. In other words, a retroactive provision.
So, will this act pass? Unlikely in its current form, but it can if changed. The aim of its authors is for this legislation to enter into force at the beginning of 2021.
Look for updates in this column on the STEP law and others like it, and note that making large donations this year can result in a large income tax bill if that law is passed in its current form.
For more information on the STEP Act in Massachusetts, contact Paul Neiffer at paul.neiffer@CLAconnect.com or 509-823-2920.