Broker Check

A Rose

| November 01, 2020
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What's in a name? That which we call a rose, by any other name, would smell as sweet.

William Shakespeare’s Romeo and Juliet

 

The way our political system works is simple. People vote for the politicians they prefer. If that politician gets more votes than their opponent, they win. (When voting for president there is the electoral college, but that is beyond the scope of this article.)

Owing to this, politicians often promise voters lots of stuff in the hope that they will be more likely to vote for them. We know, however, that politicians do not always keep their promises.

Are they lying? Sometimes. But even when they are not lying, they are rarely sharing the whole truth. In reality, most of us want our institutions to be fair and honest. But many of us also want small (or not so small) cutouts for ourselves and the people/institutions we feel strongly about.

Politicians are all too happy to promise things in exchange for our votes. What they never say is that they are promising everyone else special favors too. So, we all end up paying for ours and everyone’s else’s goodies. Eventually, the bill for these expenditures comes due.

Rule number one in politics is get elected, rule number two, of course, is get reelected. Because politicians want to be reelected, they will often work toward providing their constituents at least some of what they have promised. The challenge, again, is that they have promised lots of voters all kinds of different things. Add to that the fact that we do not live in a world with unlimited resources and things get sticky.

As I have spoken of, in live seminars pre Covid-19, meetings with clients and blog posts, most of our political leaders ultimately prefer to borrow money as opposed to cutting services and raising taxes, though they might proclaim differently. This is because both of those actions can be hazardous to their reelection possibilities.

As a consequence, our National Debt is expected to be around 28 trillion by year end. Forbes Magazine recently forecast the National Debt to be 78 trillion by the end of 2028. That is just 7.5 years from now!

I believe we are at the point where continuing to borrow, ad infinitum, is no longer tenable. Our government is in a financial position that makes it likely taxes will rise sharply in the near future.

As an example, one of the proposals of presidential nominee Joe Biden’s tax plan is to eliminate the “step up in basis” on inherited assets. While seemingly innocuous, this is an important and terrifying proposal; one I am not sure most people would read and immediately perceive as dangerous. The entire plan can be found at taxfoundation.org.

When we buy something of value such as stocks or real estate, the price we pay is known as our cost basis. Cost basis is an important number for determining both the taxes due on future gains and any write offs due on losses.

Currently, when we die and leave our assets to the people we love, their cost basis becomes the value of the asset(s) on the day we pass away. From a tax standpoint, it is as if they purchased the assets on that day.

This makes sense, since it is the value of those assets on the date of death of an individual that helps determine the value of their estate. Otherwise, the asset would be tied to the price it was bought at and the aggregate value of an estate might well be significantly lower.

To my understanding, what this means is that if you inherit an asset that was purchased for $10,000 and is now worth 1,000,000, if you liquidate it for that amount you are now exposed to taxes on $990,000 instead of zero dollars. This is because your basis is the original basis of the person who left you the asset, even though it was calculated as $1,000,000 for their estate.

What makes this even more frightening is the potential of a change in tax law that might make long term capital gains taxed at the same rate as ordinary income.

Who said you cannot have your cake and eat it too? Perhaps, they were not thinking about the government.

Currently, the estate tax exemption is just over $11.6 million dollars. That means that the first $11.6 million of estate’s value is exempt from estate tax and anything beyond that could be subject to taxation.

Many middle-class to upper middle-class folks look at the current estate tax exemption and think, “I’ll probably never be worth $11.6 million. This isn’t a concern.”

The important word here is “currently.” Estate tax thresholds can change, have changed and I strongly suspect, will change, perhaps substantially.

Even if they do not change, I would argue that an elimination of the step up in basis would create a de facto death tax on everyone with assets they pass on to loved ones. Assuming those assets have appreciated in value and are sold in whole or part by heirs.  Of course, heirs can and do liquidate inherited assets for any number of reasons.

Shakespeare told us that no matter what we call a rose, it still smells like a rose. I am telling you that no matter what we call taxes, they are still taxes.

For the most comprehensive explanation of this topic, contact your tax expert.

There continue to be ways we can reduce or even eliminate these planned attacks on our legacies. If you feel as strongly about protecting your loved ones as I do, and the thought of having a large portion of what you have worked your entire life for taken away, consider speaking with a financial planner with subject matter mastery in this area to help you take meaningful action.

Scott R. McGimpsey October 31st , 2020

This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Neither Cetera Advisor Networks LLC nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm. Securities offered through Cetera Advisor Networks LLC, Member FINRA/SIPC. Advisory services offered through Summit Financial Group, Inc., a Registered Investment Advisor. Summit and Cetera are affiliated and under separate ownership from any other named entity.

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