With democratic control of the White House and Congress, there has been much speculation about what President Biden’s tax proposal will look like, as well as the likelihood that President Biden’s tax plan will be turned into law. In April 2021, the Biden administration announced the American Families Plan, which proposed significant changes to tax law to increase taxes for both businesses and high net worth individuals and to allocate more resources to support the efforts of the IRS Enforce tax. On May 28, 2021, the US Treasury Department released a report entitled “General Explanation of the Fiscal 2022 Revenue Proposals” (commonly referred to as the “Green Book”) that provided further details on the tax law changes previously proposed in the “American Family Plan” . The purpose of this memorandum is to provide a brief overview of some of these proposed changes and to focus on how these potential changes may affect estate planning.
LONG TERM CAPITAL GAIN RECOGNITION
Generally, applicable tax laws provide that the basis for the recipient’s assets acquired upon death is the market value of those assets at the time of the death of the deceased. The recipient’s ownership base acquired through a gift is the same as that of the giver at the time of the gift. There is no liquidation event when property is acquired in the event of death or by gift, unless that property is subsequently sold (and any profit would be determined based on the recipient’s adjusted basis).
Under the current Green Paper proposal, capital gains will be realized when those gains exceed a foreclosure of US $ 1 million per person, in the transfer of estimated assets in the event of death or through a gift, including transfers to and distributions from irrevocable trusts and partnerships. The proposal would include various exclusions and exceptions for certain family businesses.
In addition, gains from unrealized appreciation will be recognized by a trust, partnership or other non-corporate entity at the end of an applicable 90 year “trial period” if that property was not the subject of a recognition event during that trial period. The 90-year review phase for real estate begins later January 1, 1940, or the date of the original purchase of the property, with the first possible recognition event taking place on December 31, 2030.
Under the proposal outlined in the Green Paper, realized gains could be paid out over 15 years in the event of death (unless the gains come from cash such as listed securities). There would be no recognition of profit for transfers to U.S. spouses or charities in the event of death. The Green Paper states that the above changes would take effect for property transferred by gift and property in the event of death of the deceased after December 31, 2021.