
Jeremiah H. Barlow
JD, Head of Family Wealth Services
President Biden proposed the American Families Plan last month, which includes several proposed changes that, if passed into law, may have a significant impact on your wealth plan. While the proposal is still in the early stages, the changes being proposed are meaningful. We encourage you to review your wealth plan with your advisor.
In late April, President Biden proposed the American Families Plan (AFP), which may bring significant tax changes, including the elimination of the step-up in basis at death which could upend a widely used estate planning tool. While some components of the AFP have made their way into various bills in Congress, it’s important to note that we’re likely to see extensive negotiations and the final law may look quite different from what is proposed. Here are some of the key proposals of the AFP that we’re tracking.
Increased capital gains and dividend rates: For households with income of more than $1 million, the long-term capital gains and dividend rates would increase to 39.6% on these types of income (the top nominal tax rate is currently 20% for taxable income over $496,000 for those who are married filing jointly). Combine this with the 3.8% Net Investment Income Tax, some taxpayers may see a top federal rate of 43.4% on the realization of capital gains or receipt of dividends.
Elimination of the step-up in basis at death: The step-up in basis would cease for gains above $1 million. Currently, when you pass away and you gift assets to your beneficiaries, these assets get a “step-up” in basis to the date of death fair market value. This means that the value of your assets is readjusted to reflect the fair market value of the assets at the time of death, effectively eliminating the tax on gains.
For example, if you have a piece of property worth $3 million at the time of your death and its cost basis is $50,000, the cost basis would be stepped up to the current value of $3 million. Your beneficiaries could sell the property with no recognition of gains. If you have assets that have a low-cost basis or assets that have appreciated significantly, currently it is better to have these assets pass to your beneficiaries after your death rather than gifting these assets during your lifetime.
Capital gain realization at death: The Sensible Taxation and Equity Promotion Act (STEP), a new Senate bill, would trigger the realization of long-term capital gains on lifetime transfers and at death. There would be an exception for the first $100,000 of gain for lifetime transfers and a death exclusion for the first $1 million of gain. There are exclusions for farms and closely-held businesses.
Reduction of estate & gift tax exemption: The current proposal does not address a change to the estate tax exemption amount, although reducing the exemption was part of President Biden’s campaign. While this could provide significant relief for many, a bill introduced in the Senate – the 99.5% Act – proposes decreasing the gift tax to $1 million and the estate tax to $3.5 million.
The proposals are silent on an effective date. While tax law changes are typically prospective, there’s significant talk about these changes being retroactive. A revision of the 2021 budget is possible, which means changes to the tax law could go into effect in 2021. Through reconciliation, this could include implementing both the American Rescue Plan and the American Families Plan through a simple majority vote, rather than requiring 60 votes (similar to how the Tax Cuts and Jobs Act was passed in late 2017). However, due to the significant impact of these tax law changes, it’s highly likely that negotiations will take some time, meaning we might not see clarity on this until later this year or even early next year.
While these proposals are still in the early stages, the changes being proposed are significant and may have a meaningful impact on your wealth plan. We encourage you to review your wealth plan and consider some of these strategies now.
If the step-up in basis is eliminated, gifting assets during your lifetime becomes much more appealing because it removes future growth from your estate. Consider the following options to create flexibility and add liquidity to your wealth plan:
Remember, none of the proposals are law and any that become law will undoubtedly look different in its final form. We highly encourage you to speak to your advisor about these potential changes and how they may impact your wealth plan. Your advisor can account for these potential scenarios and implement recommended strategies, when and if they are needed.
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