How Will the STEP Act Impact Your California Estate Planning?

October 8, 2021 / Elder Law / By Martha Patterson


The Sensible Taxation and Equity Promotion (STEP) Act, introduced by Democratic Sen. Chris Van Hollen and others in March 2021, would impose new capital gains taxes on inherited properties with appreciation values exceeding $1 million. This proposed legislation has led many Americans to reconsider the planned gifts and legacies currently in their estate plans.

While the STEP Act has not yet passed in Congress, being aware of the changes it could create is essential to ensuring that your estate plan reflects your wishes for your assets and property after you die.

Now is an excellent time to review your plan with your estate planning attorney. Here, the team of elder law attorneys at Geisler Patterson Law in Orange County, CA, explains how the STEP Act could impact your California estate plan.

Understanding the STEP Act

When you sell property that has appreciated since you originally purchased it, you must pay capital gains taxes on the increased property value.

However, under current law, if you were to leave your property to a family member or heir after your death, that heir would not need to pay any capital gains taxes on the property’s appreciated value since you purchased it. The assets would pass to the heir at the current market price.

This “stepped-up basis” loophole allows heirs to step up their cost basis and avoid capital gains taxes on inherited property. This policy has allowed many American families to amass great wealth without taxation. The senators drafting the STEP Act call it a “government subsidy for inherited wealth.”

The proposed STEP Act seeks to patch this loophole by taxing unrealized capital gains on inherited assets and property.

However, the STEP Act allows individuals to exclude the first $1 million in capital gains from taxation. For example, if the property your children inherit was originally worth $5 million and is now worth $10 million, they would need to pay taxes on $4 million of that $5 million appreciation.

This act will also allow taxpayers to pay their capital gains taxes in installments over fifteen years if the capital gains apply to illiquid assets, such as farms.

How Will the STEP Act Affect Your Estate Planning?

If it passes, the STEP Act could change many Americans’ plans for their property and assets after they die. Here are a few specific ways the STEP Act could affect your estate planning.

The STEP Act Could Be Expensive for Your Heirs

Before the STEP Act, heirs would be able to reap the full, appreciated benefits of their inherited property without needing to pay capital gains taxes. However, this act would impose additional taxes on inherited property, lowering the overall value the heirs would receive from the inheritance.

If you have owned a property for several decades, its appreciated value could be immense. Once you pass away, the capital gains tax burden would transfer to your heirs, costing them thousands or possibly millions of dollars that they would never have had to pay under current law.

The STEP Act Could Make It Challenging to Keep Farms and Businesses in the Family

The STEP Act could be particularly burdensome for families that transfer farms and businesses from generation to generation. Many of these farm families spend their lives on the farm, weathering the highs and lows of that business.

However, with the STEP Act, once the farm owner passes away, the heirs would need to pay extensive capital gains taxes on any property value appreciation exceeding $1 million. For some farm families experiencing droughts or periods of low income, these taxes could make it impossible to keep the farm running.

The STEP Act Could Prevent Your Heirs From Carrying Out Your Wishes

Let’s say you want to pass along the cherished family estate to your children after your death. The house and land have increased in value dramatically since you bought them more than fifty years ago.

The STEP Act could make it too expensive for your children to maintain property ownership since they would need to pay capital gains taxes on hundreds of thousands—or millions—of dollars to keep the house.

This scenario is just one of the many ways that the STEP Act could prevent your loved ones from carrying on your legacy and fulfilling your wishes for your property.

Geisler Patterson Law: Protecting Your Family Like A Mama Bear Protects Her Cubs

The STEP Act could limit the benefits your heirs receive from the property you leave them. However, approaching your estate plan strategically with the help of an elder law attorney can allow you to minimize this act’s impact and maximize the benefits for your heirs.

At Geisler Patterson Law, our attorneys for estate planning have exceptional skills and experience in helping individuals across California create strategic estate plans that adhere to ever-changing tax laws. You can trust our estate planners to provide sound advice and place your and your family’s best interests as our top priority.

Contact our expert team at Geisler Patterson Law at 866-452-9657 today to schedule an appointment with an estate planning attorney in Orange County, CA.

Copyright 2021. Geisler Patterson Law. 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 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 based on 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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Irvine, CA 92614
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About the Author Martha Patterson

Martha Patterson is a California Certified Specialist in Estate Planning, Trust and Probate Law, and Certified Elder Law Attorney by the National Elder Law Foundation. She focuses on Elder Law, Asset Protection and Estate Planning. She is a Member of NAELA; Past President of Southern California NAELA. Featured on CNN, Good Morning America, NBC, ABC, CBS, Fox News, and radio stations KABC, KNX, and KKLA. She overcame incredible objections and enabled Kerri and Julie Kasem to visit their dad radio host Casey Kasem. She is a frequent lecturer for NBI, and is a at MCLE events, and public forums.

Martha Patterson, Attorney