President Biden’s Budget Proposal for Taxable Gain on Gifts and Bequests—Another Reason to Consider Lifetime Gifts Now

William Stromsem, CPA, J.D.

George Washington School of Business

 

President Biden’s budget proposal would require gain recognition on appreciated assets transferred by gift or bequest and would end the step up in basis on inherited assets and the deferral of gain on gifted appreciated assets. The Biden proposal would make death a realization event and would also expand this to make gifting a realization event for appreciated assets.

 

The Basics

 

The proposal would treat death as a realization event, taxing the gain on the difference between the decedent’s basis and the fair market value at the date of death. The tax would be paid in the decedent’s final tax return. Inheritors would receive assets with a basis that is stepped-up to the fair market value at the date of death.

 

The proposal would also treat gifting as a realization event with tax due when the property is gifted as if it had been sold by the donor rather than current law where the gain is deferred through carryover basis. The gain would be the difference between the fair market value at the date of the gift and the donor’s basis, and again, the recipient would get stepped-up basis.

 

Details

 

The proposal is fairly developed with provisions that include:

• There is a $5-million-per-donor gain exclusion on income taxes on appreciated property transferred by gift or bequest to the extent that the exclusion had not already been used by prior transfers. This is to make the proposal simpler and applicable only to higher-wealth individuals.
• Gain is not taxed on items received by a surviving spouse with carryover basis that will result in gains when the surviving spouse transfers property during life or at death. This ends the partial step-up in basis at death for jointly held marital property.
• A family-owned business would not be taxed if the heirs continue running the business. This allows the business to continue and avoids borrowing money or selling off assets to pay the taxes on the gain. Again, basis carries over.
• The proposal does not contain any additional relief for family farms or businesses.
• The proposal would allow the payments to be spread over up to 15 years when appreciated illiquid assets are inherited.
• The proposal would not cover tangible personal property, avoiding some of the complexity of accounting for many assets for which the basis was never recorded.
• There’s an exemption for appreciated assets contributed to charities.
• The principal residence gain exclusion ($500,000 married filing jointly or $250,000 other filers) would continue.
• The proposal does not address capital losses on bequests or gifts of depreciated property.
• The tax imposed on gains would be deductible on a decedent’s estate tax return.
• The Treasury Secretary is authorized to develop safe harbor and other rules regarding basis where records are not available.

 

Prospects

 

Nothing will likely happen in this election year with a Republican House, but we may hear a lot about inherited wealth and the need for wealth distribution in campaigns to lay the groundwork for possible legislation next year.  If the Democrats take over or retain control over both houses of Congress and the Presidency, legislation could move next year. The Biden proposal is structured to avoid most taxpayers' concerns by only applying it to the wealthy and providing various relief measures.

 

Planning

 

Those representing wealthy taxpayers should carefully watch the November elections and consider advising clients to be prepared to make gifts of appreciated property by year-end. If the Democrats sweep, legislation next year could be made retroactive to the first day of the new Congress, and the Biden budget proposals would have it become effective for transfers after Dec. 31, 2124.  Gifts before the effective date of such legislation would allow for continued deferral through carryover basis.

 

Another reason to consider lifetime gifts for wealthier clients is that the larger unified credit offset that was enacted in the Tax Cuts and Jobs Act of 2017 will sunset at the end of 2025, reducing the offset amount from its current level of $13.61 million per donor to the inflation-adjusted from before the increase of approximately $6.5 million beginning in 2026. Legislation could extend the higher credit amount but will not be passed if the Democrats control either House of Congress or the Presidency.

 

(See the White House description of its budget proposal with the capital gains provisions beginning on page 79.)