The Biden Administration, under the American Families Plan, is currently proposing what may be the highest estate tax rates in nearly a century. Families subject to the federal estate tax under the proposed legislation could face combined tax rates of as much as 61% on inherited wealth. Under the Plan, the top tax rate on capital gains would almost double and a tax benefit on appreciated assets known as the “step-up in basis” would be eliminated.
Under the new proposal, the top capital-gains tax rate would be raised to 43.4% (up from the current rate of 23.8%). A capital gains tax would be imposed on appreciated assets at death as if they had been sold.
Under current law, appreciated assets are not immediately subject to income taxation (although they may be subject federal or state estate taxes). Generally, under the current law, beneficiaries of an estate or trust will pay capital gains taxes only when they sell the appreciated assets, and they are only taxed on appreciation that occurred after the owner’s death (the benefit of the “step-up” in basis).
President Biden’s plan to impose capital gains taxes on assets held at death includes a $1 million per-person exemption. The plan includes an exemption for principal residences and deferrals for family-owned businesses and farms. These proposed changes would take effect in 2022 in contrast to the retroactive rate increases that may be effective in 2021. This creates a unique tax-planning opportunity for 2021 to transfer wealth under the current laws before the upcoming changes.
This year the lifetime exemption for estate and gift transfer is $11.7 million per person, and people who didn’t move assets after Mr. Biden’s election have incentives to do so now. Under the Biden proposal, making gifts of appreciated assets this year wouldn’t trigger capital-gains taxes, but doing so next year would yield taxation equivalent to a sale.
All of this potential tax planning is preliminary because it takes place against an uncertain backdrop. With slim Democratic majorities in the House and Senate, Mr. Biden would need the votes of every Senate Democrat and almost every House Democrat to raise taxes on the top sliver of wealthy Americans.
If you have questions about potential changes to estate tax or are in need of direct assistance, schedule a consultation with Michael Barry of Ball & Barry Law.
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