On May 28, 2021, the “Green Book” was released, providing clarification to President Biden’s American Families Plan. This plan proposed significant changes to how tax basis is calculated on assets gifted or transferred on death.
Under current law, an heir receives assets at death with a tax basis equal to the fair market value. This increased tax basis is referred to as a “stepped-up” tax basis. If an heir decides to sell the asset immediately after inheritance, there generally would be no tax due because there would be no difference between the asset’s tax basis and its value.
When a donor gifts property to a donee, the donor’s tax basis carries over to the donee and no capital gain is realized at the time of the gift transfer.
Undoing stepped-up tax basis is just one facet of the administration’s proposed tax changes.
Under President Biden’s American Families Plan, certain donors or deceased owners of appreciated assets would realize capital gain at the time of a transfer. For a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis. For a decedent, the amount of the gain would be the excess of the asset’s fair market value on the date of death over the decedent’s basis. A transfer would be defined under the gift and estate tax provisions and would be valued using gift and estate tax methodologies.
The proposal allows a $1 million per person ($2 million per married couple) exclusion from gain recognition on property transferred by gift or held at death. The Green Book has clarified that the $1 million per person exclusion is in addition to exclusions for property transfers of tangible personal property, transfers to a spouse, transfers to charity, capital gain on certain small business stock, and the current exclusion of $250,000 per person for capital gain on a personal residence.
There is also an exclusion for family-owned businesses and farms if the assets are given to an heir who continues to run the business or farm. Generally, the payment of tax on the appreciation of the family-owned 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.
Gain on unrealized appreciation would be recognized by a trust, partnership or other non-corporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years, with such testing period beginning on January 1, 1940. The first possible recognition event for any taxpayer under this provision would be December 31, 2030.
The deemed owner of a revocable grantor trust would recognize gain on the unrealized appreciation in any asset distributed from the trust to any person other than the deemed owner or the U.S. spouse of a deemed owner and other than distributions made in discharge of an obligation of the deemed owner. All the unrealized appreciation in assets of a revocable grantor trust would be recognized at the deemed owner’s death or when the trust becomes irrevocable.
Gain generally would be reported as taxable income on a federal gift or estate tax return or on a separate capital gains return. The use of capital losses and carry-forwards from transfers at death would be allowed against capital gain income and up to $3,000 of ordinary income on the decedent’s final income tax return. The tax imposed on gains deemed realized at death (if any) would be deductible on the estate tax return of the decedent’s estate.
The per person exclusion under the proposal would be indexed for inflation after 2022 and would be portable to the decedent’s surviving spouse.
The proposal would be effective for gains on property transferred by gift, and on property owned at death, after December 31, 2021, and on certain property owned by trusts, partnerships and other non-corporate entities on January 1, 2022.
Congress will ultimately decide whether these proposals become law, but the elimination of full stepped-up tax basis at death would fundamentally change the estate planning world. If you think you may be affected, talk to your tax and wealth advisor to be sure you understand the proposed changes and are ready to adapt if the proposals become law.
Eide Bailly is here to help you make sense of how it could impact you.
This article is provided for general informational purposes only. It is not legal, accounting or other professional advice, as it does not address any individual facts, circumstances or concerns. Before making personal or business related decisions, please consult with appropriate legal, accounting or other qualified professionals.