Adding to the uncertainty around estate planning for 2025 are discussions about eliminating the step-up in basis, which would present a significant challenge for families seeking to grow wealth over generations. A recent article from Forbes, “Estate Planning: What The Potential Elimination Of Step-Up In Basis Means For Families,” explains how this tool has protected homeowners and family business owners from overly burdensome taxes.
Step-up in basis is a tax provision that adjusts the value of an inherited asset to its fair market value as of the date of the original owner’s death. If a person purchased a home for $100,000 several decades ago, now valued at $1 million, heirs would inherit the home at the stepped-up value of $1 million. If they decided to sell the property immediately, they would owe little or no capital gains taxes.
If there were no step-up in basis, the impact would be felt by middle-class families who inherit property, stock investments, or small businesses. This would have a significant impact on opportunities for building generational wealth.
Heirs who hope to keep a home in the family or continue to own rental property may find themselves needing to sell the assets to cover the tax bills. Small business owners who rely on this step-up in basis would also face a liquidity crisis, unless there were ample funds for heirs to keep running the business. The alternative is to close the business.
The solution, if this change does occur, can be found in a few different estate planning strategies. They include:
- Using trusts, such as a revocable living trust, may help manage capital gains. However, they must be created correctly by an experienced estate planning attorney. Irrevocable trusts should be examined as a possible alternative.
- Gifting strategically, even while living, may be another option. This could help by locking in current tax rules and taking advantage of the currently high federal exemptions.
- Tax planning should always be included in estate planning, especially if the step-up in basis is eliminated. Roth IRAs, 529 plans, or life insurance-based strategies may help shield assets passed on to the next generation.
- Donations to charities and the use of donor-advised funds are a means of eliminating or minimizing capital gains taxes, while supporting causes that hold meaning for the family.
However, things change, the need for proactive estate planning by a skilled estate planning attorney remains a constant. With effective estate planning, homeowners and small business owners can safeguard their wealth, ensuring it can be passed on to future generations.
Reference: Forbes (March 21, 2025) “Estate Planning: What The Potential Elimination Of Step-Up In Basis Means For Families”