Speaker 1: Tax season is in full swing and we are tackling some of the toughest topics that families will encounter today. Gift and estate taxes. Now if you give a gift of money or property during your life, you're likely subject to federal gift tax. If you give money or property to someone after you die, well, you may be hit with an estate tax for 2020. The lifetime exemption is now at about $11.5 million. Jay Solit, professor at Rutgers School of Business, joins me now to break it down for us. And it's part of our Tax is Made Simple segment brought to you by TurboTax. Welcome. Good morning. I just want to do a very elementary, basic thing because it's going to be germane to this whole discussion. When we talk about tax basis, if the government thinks I got an asset valued at $50 and it grows to $100, in most cases, this is simple terms, I subtract the basis, I get taxed on the gain of the 50, correct? That is correct. With that understanding, there are differences now in how we look at what might have been a gift in lifetime or an inheritance after someone died. Can you help me understand some of these changes?

Speaker 2: Sure. In the example you gave, if you purchased something for $25 and now it's worth $100, if I gift it to you, your tax basis will be equal to $25. If you sell it, you'll have a $75 gain, the difference between $100 and $25. Conversely, I die, I bequeath you that same share of stock, the basis equal to fair market value rule applies, you sell it the next day, your basis is equal to $100, you sell it for $100, zero gain.

Speaker 1: Okay, so if you're advising somebody right now who's still alive, who wants to leave something to someone they care about, a son or a daughter, what do you tell them about the current tax code? Because things changed for everybody.

Speaker 2: Absolutely. So in many instances, because the exemption, as you said before, is so high, it's $11,580,000, many people would be well advised to retain those shares and bequeath them instead of gifting them so that they are able to capitalize on the basis equal to fair market value rule.

Speaker 1: I want to repeat what I just heard you say because the terminology sometimes can get, I'm one of those clients who can glaze over when talking to people, but what I heard you just say is I'm more valuable to my family when I'm dead than perhaps if I gifted to them while I'm alive. Unfortunately, that may be true. Is that going to be something that might get looked at again, though, going forward? Because are these permanent changes in the tax code? Because this all expires in about seven more years.

Speaker 2: Just to point out some things politically that may be on the horizon, the basis equal to fair market value rule was instituted in 1921, so it's been with us close to 100 years. It's going to celebrate its 100th birthday just next year. Having said that, Joe Biden said that he would consider paying for community college by repealing Code Section 1014, which is the basis equal to fair market value rule. So people can count on it for today, but may not be able to count on it for tomorrow.

Speaker 1: If you were to plan today, but then the law got changed, would it be retroactive to estate planning after the fact? After the fact, no. It would hit upon the death, depending on what the law is at the time.

Speaker 2: At the time you die would be the relevant law. So there is no grandfathering, per se, of this rule.

Speaker 1: I do want to ask you about the differences state to state to state, because we've been talking about federal tax law, but this gets very complicated when you're looking at how different states look at inheritance laws. Can you help us understand where we might want to move

Speaker 2: in order to maximize what we can leave to the people we care about? Sure. So as of today, there's only 12 states that currently have an estate tax. So you have a lot of selection here, and it could be Florida, could be California, but there's some states, right now we're in New York, this may not be your go-to state because New York still has an estate tax, and the exemption is much lower than the federal exemption.

Speaker 1: And Connecticut has, they're the only state that does...

Speaker 2: Gift tax. The gift tax. So if you gift it... In Connecticut, it's not the go-to place to make gifts either. So be selective in where you have your domicile.

Speaker 1: Well, as my people say, let's head to Florida, the promised land. Thank you very much for being here, Jay Salad, professor at Rutgers School of Business.

Speaker 3: Thank you.