Biden’s Proposal to Tax Gains at Death and Other Developments
May 17, 2021
On April 28, President Biden announced his American Families Plan, which includes a proposal to repeal the step-up in basis and impose a capital gains tax at death.
In addition, there have been proposals introduced in Congress that would alter the gift, estate and generation-skipping transfer (“GST”) tax regime. Finally, New York passed legislation in April (similar to current laws in Connecticut and New Jersey) permitting pass-through entities to elect to pay state income taxes at the entity level, potentially mitigating the limitation on deductions for state and local taxes (the “SALT” deduction) for some New York clients.
Proposals to tax gains on transfers by gift or at death
The American Families Plan includes a proposal to impose a capital gains tax at death on unrealized appreciation over $1 million (or $2 million for married couples) at a tax rate of up to 39.6% (with an exception for bequests to charities). Appreciated assets transferred at death would, therefore, be subject to two taxes, a capital gains tax and an estate tax. Although the capital gains tax would likely be deductible in calculating the estate tax, the total tax increase would be significant for appreciated assets held at death. It may be possible, as has been proposed in a similar Congressional bill, that gifts of appreciated assets would also be subject to a capital gains tax.
Notably, Biden’s plan did not include a reduction in the gift, estate and GST tax exemptions or any other changes to the gift, estate and GST tax regimes.
Congressional proposals affecting gifts, bequests and the taxation of trusts
A number of proposals have been introduced in Congress that would significantly affect the taxation of gifts, bequests and trusts by lowering exemptions, raising tax rates and curtailing popular estate planning techniques (as described in more detail below). We continue to encourage clients to consider making full use of their gift and GST tax exemptions (currently $11.7 million per individual and $23.4 million per married couple) given that a reduction in the exemptions could be incorporated in final legislation and that gifts of appreciated assets could become subject to a capital gains tax.
Below are some highlights from the Congressional legislative proposals introduced so far this year.
- Exemptions and rates:
- The gift tax exemption could be reduced to $1 million and the estate and GST tax exemptions could be reduced to $3.5 million.
- Gifts in excess of the gift tax exemption (other than those qualifying for the annual, educational or medical exclusion), and taxable estates in excess of the estate tax exemption, could be subject to significantly higher, graduated tax rates.
- Changes related to the taxation of trusts:
- The unrealized appreciation on assets held in a grantor trust could be subject to capital gains tax upon distribution or upon termination of grantor trust status (including by reason of the death of the donor).
- Assets held in a grantor trust could be subject to a gift tax upon distribution, or an estate tax on the death of the donor, to the extent the trust has increased in value since the date of the gift.
- The unrealized appreciation on assets held in a non-grantor trust could be subject to a capital gains tax every 21 years.
- Annual exclusion gifts made to trusts could be subject to a cap of $30,000 for each donor ($60,000 for a married couple), regardless of the number of trusts or the number of trust beneficiaries.
- GST-exempt trusts could be limited to a 50-year term.
- Other potential changes:
- Grantor retained annuity trusts (GRATs) could become subject to a minimum ten-year term and a minimum gift tax value of the greater of $500,000 or 25% of the value of the assets contributed.
- Discounts on transfers of family-owned entities could be effectively eliminated.
- Effective dates: In general, the Congressional proposals would have an effective date as of the date of enactment or January 1, 2022, although one bill (if enacted) would be retroactive to January 1, 2021.
New York pass-through entity tax
None of the current proposals would change the $10,000 cap on SALT deductions. However, some New York clients may be interested in taking advantage of new legislation permitting a partnership, multi-member LLC or S corporation to elect to pay New York state income taxes at the entity level, thereby reducing the owners’ taxable income for Federal income tax purposes. Connecticut and New Jersey have similar laws. The effect of this entity-level tax is to mitigate the limitation on the deductibility of state income taxes for owners of pass-through entities that make the election. Clients in New York, Connecticut and New Jersey who have existing entities may wish to consider making this election (if they have not already done so), and clients who do not already have a family investment entity may wish to create one.