Are You Aware of the Wealth Transfer Implications Under the Biden Tax Plan?

WEALTH TRANSFER UNDER THE BIDEN TAX PLAN

BY ANDREW H. FRIEDMAN & JEFFREY B. BUSH

President Joe Biden is proposing to eliminate “stepped-up basis” on property transferred at death. Under his plan, transfer of an asset by gift or bequest would subject unre- alized gain to capital gains tax at the time of transfer. This change, which reverses a century of tax law, would have far-reaching ramifications for advisors and their clients.

This paper delves into the implications of a repeal of stepped-up basis, and sets out strategies advisors may consider to mitigate the effect of this potential change. The paper also considers other changes Congress might make to the gift and estate tax regime, and how advisors might mitigate those effects as well.

BIDEN’S PROPOSAL

Under current law, heirs take a basis in a decedent’s assets equal to the value of those assets on the date of the decedent’s death (a stepped-up basis). Thus, an heir never pays tax on unrealized appreciation that accrued during the decedent’s lifetime.

Biden’s proposal would require a deceased owner of an appreciated asset to recognize capital gain and pay tax on unrealized appreciation that accrued during the decedent’s lifetime. The gain would be recognized at the time of death. Similarly, an owner of appreciated property transferred by gift would recognize capital gain and pay tax at the time of the gift. These changes would be effective for gain on property transferred by gift after December 31, 2021, and gain on property owned at death by decedents dying after December 31, 2021.

Following are some of the details included in Biden’s proposal:

  • An individual would have a $1M lifetime exclusion ($2M for couples) from recognition of gain on property transferred by gift or held at death. In addition, the $250K per-person ($500K per couple) annual exclusion for capital gain realized on the sale of a principal residence would continue to apply.
  • Gain would not be recognized on a transfer of property to a spouse. The spouse would assume the decedent’s basis in the property and would recognize gain upon disposition or death.
  • Transfersofappreciatedpropertytoacharitywould not generate a taxable capital gain.
  • Taxontheappreciationoffamily-ownedandoperated businesses and farms would not be due until the interest in the business is sold or the business ceases to be family-owned and operated.
  • Taxable gain would be recognized when property is transferred to a trust or distributed by a trust. An exception is provided for transfers to a revocable trust wholly owned by the donor. In the case of a revocable trust, gain is recognized when the trust distributes property to someone other than the grantor (including on the death of the grantor).

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