Skip to main content

At the end of May, the Treasury released the Green Book (the fiscal year 2022 budget), which included an outline of the Biden tax proposals which could potentially affect estates and trusts in the very near future.  The proposal included changes to the tax rates, as well as taxation of capital gains and potential of a tax on appreciated assets bequeathed at death.  Below is an overview of the current law and how it may be impacted by some of the Biden Administration’s proposed changes.

Please note: The legislative process will take many twists and turns, and what it originally proposed, may not be what is enacted.

Top marginal income tax rate

Under current law, the top marginal income tax rate is 37%, which was placed into law by the Tax Cuts and Jobs Act (TCJA) and is effective for tax years beginning after December 31, 2017 and before January 1, 2026.

The Biden proposal increases the top marginal income tax rate to 39.6%, bringing it back to the pre-TCJA levels much earlier than expected.  The proposal would be effective for taxable years beginning after December 31, 2021.

Capital gains tax

Currently, most long-term capital gains and qualified dividends are currently taxed at rates ranging from 0% up to 20%, depending on taxable income.  In addition to this, some taxpayers are subject to the Net Investment Income (NII) tax of 3.8%, again, depending on income, for a total Federal tax rate of up to 23.8%.

The Biden proposal would increase the tax rates for a high-income taxpayer by taxing long-term capital gains and qualified dividends at ordinary income tax rates, which could be as high as 39.6%.  Add that to the NII tax and a high-income taxpayer could be paying a total of 43.4% on this income before we even get to state income taxes imposed.  The date of enactment is proposed to be effective for gains required to be recognized after the date of the announcement.

Transfers of appreciated property tax

Under current law, neither a transfer during one’s lifetime, nor at death is a tax realization event subject to federal income taxes. For example, generally speaking, when a donor gives an appreciated asset to a donee during the donor’s life, the donee’s basis in the asset and holding period is the same of that of the donor (i.e. the donee receives carryover basis and holding period).  There is no realization of capital gain/loss by the donor or donee at the time of the gift, however, the donee will realize capital gain/loss upon disposition of the asset.  When an appreciated asset is held at death by a decedent, the basis in the asset for the beneficiary is “stepped up” to fair market value at the date of death.  Consequently, the amount of appreciation accruing during the decedent’s life avoids federal (and state) income taxes.

Under the Biden proposal, the transfer of an appreciated asset as a lifetime gift or bequeathed asset at death would potentially be a realization event and a capital gain would be assessed at the time of transfer.  A few details to the proposal are:

  • The proposal would allow a $1 million per-person exclusion from recognition of other unrealized capital gains on property transferred by gift or held at death. In addition, the step-up in basis would apply to the $1 million of property received by a beneficiary.
  • Transfers to charity would not trigger a tax, nor would transfers to a spouse
  • Family-owned business and farms would not be subject to tax at the date of transfer until the business is sold or the business ceases to be family owned/operated
  • Any gain on tangible personal property (household furnishings and personal effects, excluding collectibles) would be excluded
  • Transfer to revocable grantor trust would only trigger recognition event once distribution is made to someone other than deemed owner or US spouse of deemed owner, death of deemed owner or once trust becomes irrevocable

Unrealized appreciation recognition gain

The Biden proposal would require a gain to be recognized on the unrealized appreciation of property held by a trust (or other non-corporate entity type form, e.g. a partnership), if such property has not been subject to recognition event within the prior 90 years, with the testing period beginning 1/1/1940, thereby, a potential tax starting in 2030.

What to do next?

  • Consider accelerating the realization of transactions which will result in Long Term Capital Gains
  • Consider using your lifetime Gift/Estate exemption now

The above items are just a few of the Biden Administration proposed changes outlined by the Treasury in the Green Book.  In addition, the administration recently announced its support for the Bipartisan Infrastructure Framework.  While none of the above proposals are final, it might make sense to consider reaching out to your WG tax advisor or estate/trust professionals to review how these changes affect your overall estate/trust plan.  It’s never a one size fits all answer and careful analysis is needed to ensure future tax savings, while more importantly, the needs of your family and heirs are addressed and met.

Questions? Ask a WG Advisor