• Grant Allen

Step-Up to Carryover Basis: What You Should Know

I’m not a CPA—that should be stated at the forefront of this article. If you are looking for laser-focused insight on taxes in general, a CPA is your best bet. A major part of my job is to make sure that my clients are planning for a future that essentially unknown.


Most advisors help you plan for the future, but only in one facet of retirement—accumulation. This is certainly an important aspect and will likely result in that advisor making a lot of money. However, it’s not how you climb the mountain, it’s how you get back down that matters the most.


Of course, this is where you can talk RMDs and “desired income in retirement” are main talking points. The real conversation that advisors—and clients—will be inevitably forced into is the future tax implications of your current retirement accounts, business, succession plans, estate plans, gift plans, and much, much more. You’re being forced into this conversation because let’s be honest—regardless of who you voted for, Biden’s tax plan is downright scary to the middle-class American and middle-class business owner.


Where Are We Now?


We need to know where we are in order to get to where we want to go. I use the weight loss analogy all the time, but think of it this way: in order to lose 40 pounds, we need to know what we currently weigh and be honest about it, or we’ll never know when we’ve hit our goal or the steps we need to take in order to obtain it.


Currently the step-up basis looks like this:


- Assume Linda, 78, has a portfolio that has appreciated to $3,000,000 over the course of 50 years, originally purchased at $275,000 (periodically over the course of the 50 years, not all at once)

- Current rules allow Linda’s heirs to then sell the portfolio upon her death without having to pay capital gains tax—this is because the portfolio is less than $11.7 million—which is being cut in half by the carryover basis by the way

- If they sold it more than a year from now and the portfolio had appreciated to $3,500,000, the heirs would have to pay $500,000 in long-term gain, which would be taxed at preferential rates.


What’s being proposed—carryover basis looks like this:


- Let’s say it’s the same example: Linda, 78, has a portfolio that has appreciated to $3,000,000 over the course of 50 years, originally purchased at $275,000 (periodically over the course of the 50 years, not all at once)

- The new bill would take on the basis of the decedent—meaning they would essentially be taking on the portfolio at the basis of the original $275,000

- There would also be a capital gains tax on the $2,725,000 gain of the portfolio

- Here’s where it gets scary: if the gain took the adjusted gross income over $1,000,000, the new proverbial owners of the portfolio would pay ordinary income rates on the gain, plus the net investment income tax for a total of roughly 44%

- Additionally, there is no clear state income or inheritance tax yet to be clarified—what’s likely is that you’ll basically be looking at two to three death taxes: federal capital gains, state capital gains, and federal estate or gift tax (or both)


How Do We Avoid This?


Again, I’m not a CPA, I’m a financial consultant that focuses on life insurance and annuities. Fortunately for you, those are two viable, sound options, when we’re looking at appreciated assets. You can protect your retirement with fixed-annuity options or variable annuity options if you’re still wanting to ride the waves of the market. Make no mistake, all signs point to a catastrophic crash very soon—it’s not matter of “if,” it’s a matter of “when.”


Does this mean that we stop investing? No, it doesn’t at all. I can see a scenario though at the end of 2021 that we see mass asset harvesting into safe, secure, and reliable index funds or life insurance. Life insurance is obviously our bread and butter when it comes to stockpiling money, creating an operating note, or growing a set of money to then use to go make more money—it’s only smart to have at least one over-funded policy per family/business.


This isn’t your main investment vehicle anyway—it’s a storage place. In fact, we never use the word “investment” when it comes to whole life insurance. It’s the strongest base asset you can possibly have. You not only own the policy for life, but you can borrow in and out of it as early as 10-15 days after you purchase the policy. The best part of these policies is that everything is tax-free—borrowing, growth, and upon death to name a few. And did I mention that whole life insurance keeps up with the rate of inflation—a.k.a. the invisible tax?


This entire pandemic has lead us to this point—there’s only one way left to go, as it pertains to the markets and your money.


Wrap Up


At Lyvfin, we constantly are trying to find ways to educate our audience and clients on “what’s next” or “the dangers of _______,” or “the true cost of ______,” but this article feels completely different. This is an absolute shout for action to anyone reading this and any of our existing clients who are on the fence about where things are headed in the U.S. economy. Working class Americans and business owners are going to get hurt very badly if they don’t take action and find ways to strategically place products instead of buying random financial products. Now is the time—don’t wait, schedule a meeting with us so we can secure you, your family, and your business’ financial future, today.


Visit www.lyvfin.com to schedule a meeting with a professional today!

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