By David Bartoletti and Aaron Snellenbarger, Taft Law
On May 28, 2021, the Biden administration released General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, also known as the Green Book. The Green Book proposes a number of changes to current tax law with the goal of driving more revenue. In particular, the Green Book proposes to (1) increase the highest marginal tax rate for individuals to 39.6 percent (from 37 percent today), (2) match capital gains rates to ordinary income rates for those earning more than $1,000,000, and (3) treat the death of an individual as a tax realization event (i.e., a deemed sale). Collectively, these changes substantially modify the current state of affairs for high net worth individuals when estate planning.
Generally speaking, high net worth individuals can minimize federal income taxes by holding property until their death. Upon death, the property owned by the individual receive a tax-free basis step-up pursuant to Section 1014. This planning technique, when coupled with the present gift and estate tax lifetime exemption threshold of $11,700,000 per individual, minimizes or altogether eliminates income tax and estate tax upon death for most individuals. If the proposals in the Green Book were implemented, not only would this basic planning technique of holding property until death no longer apply to avoid the payment of income tax, but all of the built-in gain on capital assets existing at death would be taxed at the new 39.6 percent capital gains marginal tax rate. While the tax paid would ultimately reduce the value of the estate passed on to heirs (and potentially the amount of estate tax due), this benefit will be partially offset by a lowering of the estate tax lifetime exemption at the end of 2025 to $5,000,000 (indexed for inflation). Notably, the Green Book does not propose reducing the estate and gift tax exemption sooner than December 31, 2025, but President Biden has hinted at further reducing the estate planning and gift tax exemption thresholds in the past.
As of the date of this post, it is unclear how much (if any) of the provisions discussed above will become law. There mere fact that such extraordinary changes to the tax code are being proposed should prompt impacted individuals to reassess their business and estate plans to ensure they are ready for these changes.
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