With Democratic control of the White House and Congress, there has been much speculation on what President Biden’s tax proposal will look like, as well as the likelihood that President Biden’s tax plan will be enacted into law. In April 2021, the Biden Administration announced the “American Families Plan,” which proposed significant tax law changes to increase taxes on both corporations and high-net worth individuals, and to provide more resources to enhance IRS tax enforcement efforts. On May 28, 2021, the United States Department of Treasury issued a report entitled “General Explanation of the Administration’s Fiscal 2022 Revenue Proposals” (generally referred to as the “Green Book”) which included more details on the tax law changes previously proposed in the “American Families Plan.” The purpose of this memorandum is to provide a brief overview of some of these proposed changes and to focus on how those potential changes may impact estate planning.
LONG-TERM CAPITAL GAIN RECOGNITION
In general, the current tax laws provide that the recipient’s basis of property acquired at death is the fair market value of those assets as of the decedent’s date of death. The recipient’s basis of property acquired by gift is the same as the donor’s basis as of the date of such gift. There is no realization event when property is acquired at death or via gift, unless and until that property is subsequently sold (and any gain would be determined based on the recipient’s adjusted basis).
Under the current proposal outlined in the Green Book, there will be a realization of capital gains to the extent such gains are in excess of a $1 million exclusion per person, upon the transfer of appreciated assets at death or by a gift, including transfers to and distributions from irrevocable trusts and partnerships. The proposal would provide various exclusions and exceptions for certain family-owned and operated businesses.
In addition, gains on unrealized appreciation will be recognized by a trust, partnership or other noncorporate entity at the end of an applicable 90-year “testing period” if that property has not been the subject of a recognition event during that testing period. The 90-year testing period for property begins on the later of January 1, 1940 or the date the property was originally acquired, with the first possible recognition event to take place on December 31, 2030.
Under the proposal outlined in the Green Book, realized gains at death could be paid over 15 years (unless the gains are from liquid assets such as publicly traded securities). There would be no gain recognition for transfers to U.S. spouses or charities at death. The Green Book states the above-referenced changes would be effective for property transferred by gift, and property owned at death by decedents dying, after December 31, 2021.