What You Need to Know about the Sensible Taxation and Equity Promotion (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.

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