Washington’s Tax Proposals Could Mean a Big Hit to You and Your Estate Plan. Here’s What We Know So Far

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Capitol Hill Is Taking Big Measures to Fund the U.S. Infrastructure, and Your Estate Plan Could Take Up a Hefty Chunk of It. Our Estate Planning Attorneys Explain

Since the beginning of 2021, we have heard about everything from President Joe Biden’s $6 trillion American Families Plan to a potential $1 trillion bipartisan infrastructure bill. But where will the money come from? According to Biden and select members of Congress, a fair amount of it may be coming from you and your estate by way of high taxes.

If you have an estate plan already in place, or if you’ve been wanting to put one together, it’s best to review what Capitol Hill could have in store for you depending on where you land on the tax bracket.

What Tax Plans Have Been Proposed?

Since Biden assumed office in January 2021, both his administration and Congress have been busy formulating ways to raise more capital to support proposed programs. The most common is via taxing the American people.

In addition to Biden’s American Families Plan, four other plans have been or will be proposed:

    1. Bernie Sanders, I-Vt., has proposed the “For the 99.5% Plan,” which he calls “a progressive estate tax on the fortunes of the top 0.5 percent of Americans.”
    2. Todd Van Hollen, D-Md., proffered his “STEP Act,” which stands for the Sensible Taxation and Equity Promotion Act. It is designed to “end government subsidies for inherited wealth” by substantially curtailing the step-up in basis.
    3. Elizabeth Warren, D-Mass., suggests an “Ultra Millionaire Tax,” which aims to tax 2% of the net worth of households and trusts between $50 million and $1 billion.
    4. Ron Wyden, D-Ore., is expected to introduce a “Mark to Market” bill, which may require annual recognition of unrealized gains and losses from tradable assets (e.g., stocks and bonds) on taxpayers with over $1 million in income and $10 million in net worth.

How Will the Proposed Plans Tax Your Income?

Currently, the highest tax bracket begins at $523,000, which is taxed at 37%. Biden’s plan seeks to lower the highest tax bracket to $400,000 with a return to a 39.6% rate. As noted above, Warren seeks to impose additional taxes at certain benchmarks based on net wealth.

What Are the Proposed Changes in Taxes on Capital Gains?

The capital gains we earn on the sale of stocks, bonds, or real estate start getting taxed at 15% at $40,001, and that tax rate rises to 20% at $441,451. Under Biden’s American Families Plan, anyone making more than $1 million per year would have to pay nearly twice the current top rate, at 39.6% on long-term capital gains. Essentially, Biden proposes that millionaires pay the same 39.6% tax on long-term capital gains that they would pay on ordinary income, such as wages.

Capital gains taxes are not due until the asset in question is sold. However, Wyden, in his coming bill, will seek to apply new anti-deferral rules, which would generally require annual recognition of unrealized gains and losses from tradable assets.

To calculate the tax due on gains from non-tradable assets such as investment real estate, closely held businesses, and valuable collectibles, the proposed mark-to-market system generally would use a “lookback” rule upon disposition of the asset. The resulting lookback charge would tax the gain in a way intended to diminish the benefit of deferring tax until the sale or disposition.

Is the ‘Step-Up’ in Basis at Death at Risk?

For decades, one way to avoid capital gains has been to wait to distribute the asset until after death when the asset acquires a new fair market value, calculated as of the date of death of the transferor or his/her trust or estate. This increase in value is called a step-up in basis. That strategy is at risk under Biden’s proposal and Van Hollen’s “STEP Act.”

Van Hollen calls the step-up in basis “a loophole,” despite the fact that this practice has been legally recognized for decades. While allowing for a $1 million exclusion from taxation, the STEP Act otherwise will tax gifts, transfers to non-grantor trusts, and distributions at death. So, assets that once received the step-up in basis would be taxed on the difference between the fair market value on the date of death and the original purchase price plus, in the case of real estate, the verified cost of any improvements to the asset.

For some, this may mean taxes on hundreds of thousands of dollars, even millions. Further, unlike the other proposals, Van Hollen wants to make this law retroactive to January 1, 2021.

While it is uncertain whether anyone on Capitol Hill would vote to make this retroactive, it is important to bear this possibility in mind when transferring any assets this year.

How Much Can You Give During Life and After Death?

While one can currently give up to a combined total of $11.7 million during life and after death, and married couples can double that sum to $23.4 million, both Biden and Sanders would like to uncouple this exemption and significantly decrease it to $3.5 million after death and $1 million during lifetime before taxes. Once taxes are levied, Sanders’s plan calls for the highest tax bracket to increase from 40% to 45% up to $10 million; 50% up to $50 million; 55% up to $1 billion; and 65% thereafter.

How Can the Estate Planning and Administration Attorneys at Chapman Law Group Help You to Prepare?

Of course, none of these bills have passed at this time. Like most major legislation, they will be subject to congressional debate and modification after possible negotiation if they are ever enacted. Still, it is important to know about them now before they are passed, so that you can plan your finances and estate for them.

The Estate Planning and Administration lawyers at Chapman Law Group are constantly monitoring these developments. We invite you to contact us today to learn more about what we can do for you.

Look for a new article soon on various strategies you can take to navigate the changing economic times, such as estate tax exemptions.

Need an Attorney? Contact us now!

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David B. Mammel

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