On May 28th, the Biden administration released its general explanation of tax proposals in what is often referred to as the “Green Book.” As with other proposals that have been introduced over the past few months, there is great uncertainty as to whether or not these proposals will ultimately get passed. We will discuss herein the salient provisions of the proposals that affect the current estate and gift tax regime.
Surprisingly, the Biden administration is not proposing the anticipated reduction of the estate and gift tax exemption, which Biden had focused on during his presidential campaign. Instead, the administration is proposing that transfers of property by gift or at death, including transfers of property to, and distributions in kind from, a trust, partnership, or other non-corporate entity (other than a grantor trust that is deemed to be wholly-owned and revocable by the donor), are treated as realization events and taxed. The proposal also introduces a periodic recognition of gain for assets held in trusts reaching a maximum holding period. Specifically, the proposal provides that if there has not been a recognition event in the last 90 years with respect to the property, then the gain on the unrealized appreciation is recognized (retroactively back to January 1, 1940).
The proposal does provide a $1 million per-person exclusion from gain. This amount is portable to a surviving spouse and would be indexed for inflation. Typically, if there is a realization event, then the recipient’s basis in the property should be the fair market value at the time of realization. Under the proposal, that is the case for transfers at death, and the recipient of the property receives an adjusted basis, even if no tax was ultimately owed because of the $1 million gain exclusion. However, for lifetime gifts, the proposal does not provide a basis adjustment for property shielded from recognition by the $1 million gain exclusion, and the donor’s basis will carryover.
It should be noted that the proposed gain realization regime is not applicable to the transfer of certain small business stock (QSBS) and tangible personal property, such as household furnishings and personal effects (excluding collectibles). Additionally, the proposal excludes transfers to U.S. spouses and defers the payment of the tax on the appreciation of certain family-owned and operated businesses until the interest in the business is sold or the business ceases to be family-owned and operated. The proposal would also allow for the exclusion of up to $250,000 of gain per taxpayer on the sale of a principal residence that is currently allowed. This $250,000 would also be portable to the surviving spouse for transfers at death.
Generally speaking, all of this means that if the Biden proposal is passed, gifts and bequests of appreciated property can be subject to both income and estate tax, which would have a dramatic impact on estate planning for high-net-worth individuals. The Biden proposal is calling for these gain recognition provisions to apply for all gifts and deaths occurring on or after January 1, 2022, which is welcome news. Accordingly, individuals should consider employing estate planning techniques now to avoid application of this income tax (or possible gift or estate tax under other proposals) before legislation is passed.
DISCLAIMER: We provide the information in this article for general information purposes only, and these materials do not constitute legal or other professional advice. We do not accept any responsibility for any loss that may arise from reliance on the information contained herein. No reader should act or refrain from acting based on information contained in this article without seeking advice of counsel.