On April 28, 2021, President Biden announced the American Families Plan. The Plan proposes various programs and initiatives; the Plan also includes proposals on how to pay for the programs and initiatives. One of the proposals involves treating death as a realization event for capital gains purposes. For ease of reference, this proposal will be referred to as the “Biden capital gains proposal” in this post.
At this time, we do not have many details on the legislation that will embody the proposal, but we do see some notable considerations. The outline of the Biden capital gains proposal to tax gains at death resembles the Sensible Taxation and Equity Promotion (“STEP”) Act proposed by Senator Chris Van Hollen (D-MD) (see our prior article about this proposal here). Unlike the STEP Act, the Biden capital gains proposal contains an exception for family farms and businesses. Presumably, there will be qualification tests for what constitutes a family farm or business (as a possible example of such tests, a review of the now-expired Internal Revenue Code §2057 might be instructive).
Notably, the Fact Sheet for the American Families Plan did not mention any changes to the federal estate, gift and generation-skipping transfer tax. Of course, it is possible that changes will be proposed as legislation is drafted.
As a result of the proposed increase in capital gains rates for those with income in excess of $1 million and the proposal to tax gains at death (and, presumably, gains with lifetime gifts), clients may look to complete transactions or make gifts this year. This, of course, assumes that the effective date of the proposal, if enacted, will be sometime in the future.
The italicized excerpt below is from the Fact Sheet.
End capital income tax breaks and other loopholes for the very top. The President’s tax reform will end one of the most unfair aspects of our tax system: that the tax rate the wealthy pay on capital gains and dividends is less than the tax rate that many middle-class families pay on their wages. Households making over $1 million—the top 0.3 percent of all households—will pay the same 39.6 percent rate on all their income, equalizing the rate paid on investment returns and wages. Moreover, the President would eliminate the loophole that allows the wealthiest Americans to entirely escape tax on their wealth by passing it down to heirs. Today, our tax laws allow these accumulated gains to be passed down across generations untaxed, exacerbating inequality. The President’s plan will close this loophole, ending the practice of “stepping-up” the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity. The reform will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business. Without these changes, billions in capital income would continue to escape taxation entirely.