President Biden proposed a new tax plan called the American Families Plan. It includes many provisions and tax consequences. Below outlines the provisions of the plan relating specifically to estate returns. Be sure to catch Carrie Christensen’s article covering the other provisions in the tax plan that may cost you money.

Currently when someone passes on, they do not have a taxable estate unless their estate is over $11,700,000. In addition, the beneficiaries receive a step-up in basis, which means each beneficiary’s cost basis in an asset is the fair market value at the date of death. For example, if the decedent owned a home that was purchased for $500,000 and includes $100,000 in improvements, then the basis is $600,000 to the decedent. Once the decedent passed on, the home would receive a step-up in basis to current fair market value. Let’s assume the house is now worth $900,000. The beneficiary can turn around and sell the house after inheriting for $900,000 and not pay a single penny in tax.

The American Families Plan is going to change this. The plan now calls for all inherited property to be treated as a sale and the tax will be due upon the decedent’s passing if the decedent has capital gains in excess of $1 million ($2 million per couple). There would also be a $250,000 ($500,000 per couple) exclusion of gain on personal residence. There would be no more step-up in basis, but the new basis would still be the fair market value of the asset because the beneficiary had to pay tax on the gain on the transfer or “sale” of the asset.

The farmers and ranchers are our biggest group of clients that this will affect, due to the land and assets they hold. The proposal does include an exemption for family-owned businesses. The proposal states that if the decedent was active in the business for five out of the last ten years and the beneficiary will be an active participant, then the tax will be “deferred.” The reason the tax is deferred is because there will be no step-up in basis. That means, whatever the basis in the asset was with the decedent, that is the basis for the beneficiary. If the decedent was not active in the business five out of the last ten years, the business would be subject to the same taxation as everyone else. Note that cash rent does not qualify as an active participant. What is not clear at this time is what happens if down the road the beneficiary is no longer active, is the tax due at that time or is there an “active” period that would be implemented for the exempted assets.

The new plan will treat every transfer of property and assets as a taxable event, a pseudo sale if you will. This will potentially cause a lot of problems for asset rich and cash poor families. This law would cause families to have to sell assets to pay the tax due. At the proposed top tax bracket, all inherited assets have the potential to be taxed at 43.4%. At present, it is not known if or when the proposed tax bill will be passed. Income tax brackets are also unclear at this time. In addition, there may be changes to current gifting rules. There are a lot of “ifs” at this point, but the KTLLP Estate Team wanted to provide awareness. KTLLP can put together a plan that will best suit you, your family, and the livelihood of your business.