This Story Has a Happy Ending

As you may recall, we discussed the proposed changes to the tax code in the second quarter edition of A Step Ahead. The focus of that article was the significant change that was anticipated in the way that capital gains will be taxed. Under the current rules, capital gains are taxed when there is a taxable event. If an appreciated asset is sold, it is reported in the tax return for the year of sale and is subject to a capital gains tax. Under the current rule, upon the death of an owner, there is a step-up in basis. This means that any appreciation which occurs before the date of death is eliminated and any potential capital gains tax is based upon the fair market value as of the date of death of the decedent/owner. Of course, this is a significant benefit to beneficiaries of the decedent who avoid the capital gains tax on all of the appreciation earned during the decedent’s lifetime.


The Biden administration’s Build Back Better program contained a proposal that would capture the tax on appreciation on the mere transfer of the appreciated assets even if not sold. Under that scenario, gifts of appreciated assets to children or trusts would be considered taxable events and a capital gains tax would be imposed on the unrealized profit earned by the asset even though the asset was not liquidated. The program imposed a capital gains tax even if the asset was not transferred during the owner’s lifetime. Under that scenario, a taxable event would be deemed to have occurred at the death of the owner of the appreciated assets, resulting in the imposition of a capital gains tax at death, thereby eliminating the step-up in basis. There were a number of other proposals included in that program which would have reduced the federal unified estate tax exclusion and altered other complicated rules that impact estate tax planning such as the grantor trust rules.


Needless to say, these proposals created a great deal of consternation in the estate planning community and among our clients. While not every client has a taxable estate, virtually everyone owns assets that have appreciated in value: their home(s), stock or other investments which have grown in value since the date they were first acquired.


Contributing to the apprehension caused by the proposed changes, on September 13, 2021, the Chairman of the House Ways and Means Committee, Richard Neil, introduced the Committee’s proposed budget. The draft legislation included a reduction of the lifetime exemption from estate and gift tax from $11 million to $6.02 million per person, adjusted for inflation since 2011. The proposed legislation also included changes to the rules for grantor trusts created or funded after the date of enactment. Notably, the pro- posed legislation would not have impacted the step-up in basis at death for inherited assets as initially proposed by the Biden administration.


In our earlier article, we expressed our skepticism that these proposals would be enacted. We opined that it was unlikely that any of these proposals would pass because the Democrats did not possess a sufficient majority in the Senate. As it turned out, these proposals were not shut down in the Senate. Rather, because the Democratic Party is so divided in the House, the Biden Build Back Better program was scaled back before even coming to the House floor — from $3.5 trillion to $1.75 trillion. As a result, the changes affecting estate planning were eliminated in the version considered and passed by the House.


So, like the dream sequence in the final episode of Newhart, starring Bob Newhart, did all the hoopla regarding the changes actually occur? Well, yes to the hoopla, no to the results.


Although it is unlikely that there will be changes to the estate tax, grantor trust rules or capital gains taxation, at least this year, our clients should nevertheless be vigilant. You want to ensure that your estate plan is current and reflects your current wishes. Now is the time to contact us to review your estate plan. Do not hesitate to contact us so we can help you accomplish your goals.