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STEP Act

What You Need to Know about the Sensible Taxation and Equity Promotion (STEP) Act

STEP Act

In March 2021, the Sensible Taxation and Equity Promotion (STEP) Act proposal came into public view. What does it propose, how does it differ from the previous taxation laws, and how can it affect you and your property? In this article, the PJI Law, PLC team in Fairfax, Virginia, explains how this STEP Act might be relevant to you in your estate planning.

The Stepped-Up Basis

Until now, many American families have benefited from a system known as the stepped-up basis, which has enabled them to bypass capital gains taxes when someone inherits property. Under this rule, an inherited asset steps up in value when the original owner dies so that the heirs pay a lot less in capital gains taxes.

The stepped-up basis principle has allowed families to pass on assets for generations while bypassing taxation.

How Does This Work?

Let’s say that Mr. and Mrs. Jones, a couple that has worked hard for their family and invested wisely, conduct multiple real estate transactions during their lifetime. The value of their assets grows, and during the next 30 or 40 years, their property appreciates impressively.

If Mr. and Mrs. Jones were to sell their property during their lifetime, they would need to pay considerable capital gains tax. But when they die and their children, Michael and Laura, inherit all assets, the current income tax laws disregard the appreciation in the value of the Jones property.

As this process goes on throughout generations, it can effectively keep money and assets in the Jones family without paying taxes on the gains.

The New STEP Act Proposal

The STEP Act has been developed to change the step-up basis tax rule. In practice, the act’s provisions would mean that any property transfer would be subject to a transfer tax either as inheritance or during the individual’s lifetime.

The updated tax regulations would apply to any gain exceeding $1 million at death or $100,000 during a lifetime, provided that the recipient is not a spouse, charity organization, qualified disability trust, or cemetery trust.

Many individuals have been using the step-up basis method of transferring assets to a trust as a means to avoid income tax. The STEP Act would remove this practice, making transfers to a trust also taxable.

The STEP Act would require all non-grantor trusts to report gains on appreciated assets once in 21 years. If a trust has over $1 million in assets or over $20,000 of gross income, it would need to provide a balance sheet and income statement to the IRS, along with a list of trustees, beneficiaries, and grantors.

If the STEP Act passes as a retroactive provision, any inheritances or gifts transferred after December 31, 2020, could be taxable.

Criticism of the STEP Act

The STEP Act proposal has evoked some resistance and warnings about its possible implications. In particular, it has raised concerns among farmers who may own considerable landed property and extensive farm equipment but who often struggle with fluctuating incomes and high agricultural business expenses.

Farms and other illiquid properties would be taxable even if they stayed in the family – in the event the children carry on their parents’ business, for instance. The heirs would have 15 years to pay the transfer tax. For some farmers, the tax would make it impossible to hold on to an inherited family property.

The proposed STEP Act could also become problematic in the scenario of adult children having guardianship over an elderly parent, such as incapacitation, mental illness, or dementia.

Under the current step-up basis approach, the legal guardians have an incentive to retain any property during the family member’s lifetime. But if the STEP Act passes, one may expect that more guardians would choose to sell family property, potentially leaving many elderly people financially vulnerable.

Furthermore, eliminating the step-up basis would create considerable difficulties for estate administrators trying to ascertain the change in the basis value of the inherited or gifted property.

What Would Changes in Property Taxation Law Mean for Me?

It is important to remember that the STEP Act proposal has not passed yet, so its final form is subject to changes.

If you have any concerns about property transfer regulations or taxes, we recommend consulting a knowledgeable estate planning attorney who can recommend a viable property and inheritance management strategy.

PJI Law, PLC: Estate Planning Attorneys in Fairfax, VA

Welcome to PJI Law, PLC, a law firm that provides efficient, top-quality legal services in the areas of estate planning, probate, business law, and civil litigation. We focus on each client’s unique story while we offer personalized service and attention. Our professionalism, experience, and dedication manifest in our excellent reputation and stellar client reviews.

To get in touch with a member of the PJI Law, PLC team in Fairfax, VA, call 703-865-6100 or fill out our contact form.

Copyright © 2021. PJI Law, PLC. All rights reserved.

The information in this blog post (“post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

PJI Law, PLC
3900 Jermantown Rd #220
Fairfax, VA 22030
Phone:703-865-6100
https://www.pjilaw.com

What Happens if I Die or Get Incapacitated Tomorrow, with No Plan in Place?

What’s the most popular estate planning option? Will-based planning? Trust-based planning? Unfortunately, it’s neither. Number one on the list in Virginia is: doing nothing. The more technical term for this lack of planning is called “dying intestate.”

“Dying intestate” simply means that you have decided to depart this world without doing any estate planning whatsoever. While your family will be horrified at this prospect, your unintended beneficiaries, the government and the probate court will all be delighted.

By dying intestate, you will have allowed the government to draft your estate plan for you. As a result, they can tax your estate and impose other costs at the maximum amount allowable by law. In addition, your assets will go to people according state law’s priorities, not your own. For example, most married couples want their share of the estate to be used by the surviving spouse before the children inherit. However, if you have a blended family situation and provided no direction ahead of time, when you die, the court will only give one-third of your estate to your surviving spouse and two-thirds to your children from a previous marriage.

This problem is exacerbated before you die if you have no incapacity planning documents in place. If (and more likely, when) something happens to you that renders you unable to handle your own affairs, without you having a proper legal plan in place, you will have to go through a legal proceeding where a court appoints a guardian to handle your personal affairs and a conservator to handle your finances. The procedure is oftentimes referred to as “living probate.”

Living probate can be a living nightmare for you and your family for several reasons. First, it can be a humiliating process. You are declared incompetent in a public proceeding. Next, the court is in charge. It will decide which people will manage your affairs; it’s neither you nor your family’s choice.

Because of this court proceeding, there is lag time in the management of your affairs due to paperwork and delays. Of course, these hassles can add a lot of stress and expense to what is already a very stressful situation for your family.

Finally, living probate can be very expensive. Typically, there are court fees, attorneys’ fees, expert witness fees and accounting fees. Additionally, once your conservator has been appointed by the court, this person has to give an annual accounting to the court on how your financial affairs have been managed. This is true even if the court appointed your spouse or one of your children as your conservator.

Doing nothing hurts you, but hurts your family even more. Most of our clients tells us that the reason they’re doing proper planning is to protect their family. If that sounds like what you wish to do, we at PJI Law are here to help. Call us at (703) 865-6100 or email us at family@pjilaw.com.

3 Reasons Why Adding Your Children as Co-Owners on Your Financial Accounts Is an Awful Idea

It has become common practice in Virginia for a surviving parent, after their spouse has passed away, to name one of their children as a co-owner of some or all of their financial accounts. There are a few reasons parents do this, but oftentimes it is to make sure that the child can access the parent’s account for the parent’s benefit if the parent becomes mentally or physically incapacitated. It is sometimes perceived as a shortcut to creating a proper estate plan with a portfolio of legal documents drafted by an attorney.

However, adding a child as a joint owner of your financial accounts is fraught with peril. Here are three of the main reasons:

  1. By adding your child as a joint owner, you are exposing your financial accounts to your child’s creditors. If your child ever goes through financial hardship (perhaps even due to a tragic accident), their creditors may try to collect by garnishing your child’s financial accounts, including ones where you established your child as a joint owner.
  2. Second, you are exposing your finances to your child’s control before you need to cede control. You hope that your child will continue to act in your best interests once you add them as a joint owner to your accounts. Most children will. But some do not, sometimes due to pressure from a spouse. And when they do not, you cannot simply remove the child from your accounts. You must have the child’s written permission to have them removed as a co-owner. Or you can close the account and withdraw all of the funds; of course, you have given your wayward child the ability to do the same thing.
  3. Finally, you may unintentionally disinherit your other children. For example, you have three children, two of whom live in another state, and one lives locally. It is not rare in such a case for a parent to add the child who lives locally as the joint owner on the financial accounts. However, if that is done, joint accounts usually have a survivorship clause in the contract. Which means when the one co-owner dies, the account is now solely the property of the surviving co-owner. Which means the local child inherits all of your financial assets at your death while your other children receive nothing.

There are more problems, of course, but no need to pile on.

So, what do you do? How do you properly allow a child to help you with your finances without adding the child as a co-owner on your accounts? One method is to make your child an “authorized signer” on your financial accounts. That way, the child can sign checks and engage in transactions on your behalf while exposing your finances to only some, but not all, of the perils of co-ownership.

A far stronger solution is that you can, as part of your estate plan, name a child your financial agent in a General Durable Power of Attorney document. Under such a document, your child has the power to engage in financial transactions of your behalf, but they are not considered a co-owner of the accounts. The child has obligations to meet under the law to act in your best interests as your agent and you can revoke the Power of Attorney documents at any time, unless you lack mental capacity.

There are additional aspects of an estate plan that can even make it easier on your child to help you, while simultaneously protect you and your family even more. If you would like more information, please call our team at PJI law at (703) 865-6100, or email us at poa@pjilaw.com.

 

Remember Your Loved Ones (of All Species!) in Your Estate Planning

When thinking about estate planning, most of us think about our loved ones. Who will take care of my children? Who will inherit my estate? How will my spouse manage to pay the bills? However, a beloved household member is often overlooked . . . the pet!

While Virginia still classifies pets as property, their owners often treat them as members of the family. As such, responsible pet owners need to have a contingency plan in place for their pets in case something happens to the owners. If you leave your planning to chance, your pet’s future is uncertain. If something happens to you, your pet will be left relying on your friends or family to step up and care for them. If no one has the desire, time, space, or resources, your pet may end up at the mercy of a shelter or adoption agency.

You may believe you’ve addressed this issue via a verbal agreement with someone you trust. You may have a friend or family member who is pet-friendly and has told you they are willing to care for your pet. Unfortunately, that verbal agreement does not come with any guarantees that the person will (or, more often, can) follow through when circumstances change and times get tough, not to mention the potential disputes and competing claims over your pet that may arise among your family, friends, and acquaintances.

Good planning ensures your pet is properly provided for.

A far better course of action is to provide for your pet in your Last Will and Testament. This can be as customized as your needs require. You may simply direct whom you want to take care of your pet, you can set aside money for that person to use in caring for your pet, or you can even establish a pet trust.

A trust may cost slightly more to establish than a provision within your Last Will and Testament, but that is the safest way to ensure that your last wishes will be followed with respect to your pet. With a trust, you can not only leave your pet to someone’s care, but you can also leave funds to be specifically used for your pet and outline the conditions for use.

In addition to these formal steps for ensuring the care of your pet, it is also necessary to prepare the person you choose to care for your pet. Make sure the person knows where to find important information like medical records, and organize those records so that the person can easily identify allergies, medical conditions, and medication. Have the person and your pet spend time together and get to know each other. It would be helpful for the person to have information about your pet’s groomer, sitter, routine, and favorite things. These steps will make the adjustment period much easier for everyone involved.

Responsible pet owners must think about all of their loved ones, including their pets, and plan for the unexpected. Our PJI Law family has many pets, and being very much in the same boat as you are, we care about you and the ones you love, regardless of their species. Contact us if you would like to discuss options for your estate plans and the plans for your loved ones.

Protect Your Digital Assets After Death

Most Virginians know the importance of having estate planning documents drafted in order to ensure that their final wishes are carried out, their assets are distributed to their loved ones, and any loose ends are eliminated. When planning, people often think about their personal property, real estate, and bank accounts. They may even make specific provisions for sentimental items such as family jewelry, paintings, pictures, and furniture. However, times are changing and it is important to have the information and guidance to not only plan ahead, but also to think outside of the box, or the home, as the case may be.

In our technologically savvy age, many assets are moving away from the physical realm and toward the digital frontier. Photographs have vanished from the beloved family albums and are now only maintained on social media sites. Some of these sites are password protected or are impossible to recreate. As we become more reliant on technology, we need to take different steps to ensure that our estate plan also protects our digital assets.

Being locked out of your online accounts can present a significant challenge to your family upon your passing.

Ownership varies depending on the type of digital asset. This means that some things are owned by you, while other things are still owned by the license holder. For example, your family photographs uploaded to social media are typically yours, but you only hold a license to any music on iTunes. With this in mind, it is important that the person responsible for managing your estate is aware of your digital accounts, what your level of ownership is, and how you wish for these accounts to be managed.

Some online giants provide some resources for those planning ahead. For example, Facebook allows you to name a “legacy contact” who would have some access to your Facebook account after you pass away. Google can be set to send an email t trusted contacts a certain amount of time after inactivity (presumably death), and allows you to share certain data with those contacts.

These companies’ resources, however, are limited and typically further action would need to be taken. Clients have a variety of options ranging from providing account information that is stored with his or her Last Will and Testament, to obtaining password storage services, to employing a service that provides for post-mortem storage. There are benefits and drawbacks to each of these options, but it is important to consider the issues and work toward setting the plans in place to meet your goals.

This is only one of the many discussions we have with our clients here are PJI Law. It is of utmost importance for us that our clients be fully informed of their options in order to strategize and meet their estate planning goals, and in this age this includes a thorough understanding of digital assets.

How to Discuss Estate Planning with Your Family

Death and money are among the two most difficult subjects to talk about. So it is no surprise that combining them both into a discussion with loved ones about estate planning can be incredibly uncomfortable.

With that in mind, we at PJI Law recommend that families have an open dialogue among themselves about estate planning. Estate planning is not only for the elderly or the wealthy. Parents with young children need estate plans to ensure their children are provided for physically and financially. Children over the age of 18 need estate planning documents so that their family can help them manage their finances or make medical decisions in case of an injury or sudden disability. Older adults need them so that their loved ones have peace of mind and are not left guessing about last wishes, or even worse, litigating them. These discussions don’t have to be negative, since they stem from loving, caring for, and planning for our families. In fact, creating an estate plan is a very empowering experience for many people.

Estate planning isn't only for the elderly - all families must do it.
Estate planning isn’t only for the elderly – all families must do it.                                                                        

When looking to approach family members about estate plans, particularly if you have found it difficult to do so thus far, we recommend the following tips:

  • Talk about your own estate plan and goals. If your loved ones know you have taken these steps for yourself, they may be more receptive to the suggestion that they do the same.
  • Keep a tone of respect. The person you are talking to is an adult (whether it is someone younger or older than you). People are more engaged when they feel that they are an integral part of the discussion.
  • Be direct and communicate your position.
  • Make sure you focus on the positive aspect of being in the driver’s seat and making the decisions for yourself while you can.
  • Don’t nag. Simply plant the seed and water it from time to time.
  • Voice your opinions and concerns using “I” statements.
  • Don’t blame or use “You” statements.
  • Be mindful that it may take some time and many conversations for there to be progress.

At PJI Law, it is our goal to give our clients the education and tools they need to take control of their futures and to plan for their loved ones. If you are one of the many Virginians without estate planning documents (including a Last Will and Testament, a Living Will, a Financial Power of Attorney, and any necessary trusts), we are ready to help you take the first step in ensuring your loved ones are cared for. Please call us to schedule a time to meet with one of our attorneys to discuss the next steps.

Does Your Will Encourage Lawsuits Between Your Family Members?

Many people in the Northern Virginia area are familiar with the concept of a Last Will and Testament (“Will”). Generally speaking, a Will is a document that dictates how and to whom your property will be distributed upon your death. However, have you stopped to wonder what would happen if those who survive you (family, friends, and those who claim are friends) feel snubbed by the distribution and try to contest and challenge the Will? That’s when things get tricky, and at PJI Law we help our clients implement strategies to avoid pitfalls such as will contests.

Hope for the best, plan for the worst. If you fail to plan, a will contest could cost your estate significant legal fees, even if your true wishes prevail. It will also cause hardship for your loved ones and beneficiaries because your estate cannot be distributed during a will contest. Furthermore, you risk a judge making or changing some of your most personal and important decisions.

Poor drafting can invite Will contests at a most difficult time for your family.
Poor drafting can invite Will contests at a most difficult    time for your family.                                                                

The good news is, if you plan properly, there are ways to deter a will contest. One simple way is to include a provision whereby, if someone challenges your Will, he or she will forfeit that portion of the estate. Another way is to specifically identify who is not inheriting under your Will and explain that they are not receiving a share because they are provided for in another manner (for example through a life insurance policy). Another option is to create a revocable living trust that will hold the property, avoid probate, and appoint a trustee to act on your behalf to divide your estate. And last but not least, there are certain formalities that you can follow when executing your Will that will establish a presumption that it is valid.

When establishing or revising your estate plan, these are only some of the issues the attorneys at PJI Law address to ensure you are protected now and in the future. If you would like to discuss your estate plan with us, please feel free to call us at (703) 865-6100 to schedule a consultation. We look forward to helping you!

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