Beth Kaufman Comments on Estate Planning Under New Biden Administration

One of President-elect Joe Biden’s most significant proposals to tax the estates of wealthy individuals doesn’t actually involve the estate tax — yet.

Biden has often said that he supports repealing stepped-up basis at death, but that’s not quite what he’s proposing to do, according to Beth Shapiro Kaufman of Caplin & Drysdale. Instead, he is calling for treating death, as well as gifts, as capital gains realization events, she said.

Under Biden’s proposal, the unrealized gains of a decedent would be taxed on a decedent’s final return, and the unrealized gain on a gift would be taxable to the donor, Kaufman explained. “So you still end up with a stepped-up basis; you’ll just have to pay the tax to earn that stepped-up basis,” she said January 13 at a District of Columbia Bar virtual tax conference.

“This would be a huge change. It’s basically imposing something that’s like the Canadian system, but when Canada did this, they got rid of their estate tax and substituted capital gains at death,” Kaufman said.

Biden and Congress agreeing to a similar arrangement may not be “terribly likely to occur” this year, as it would probably require years of discussion, Kaufman said. But it wouldn’t necessarily be a non-starter with Republicans, she continued, noting that President Trump, during his 2016 campaign, similarly proposed pairing elimination of the estate tax with deemed realization at death.

“There may be some room for negotiation, some kind of middle ground here, that would end up getting rid of the free step-up at death,” Kaufman said.

Biden’s proposal differs from most proposals on stepped-up basis, which include a carryover basis system, like the December 2019 joint proposal from Sen. Mitt Romney, R-Utah, and Senate Finance Committee member Michael F. Bennet, D-Colo. Biden's plan would likely involve exceptions, such as those for gifts to charity or to a spouse, and for various asset classes and exclusions for taxpayers below a designated threshold, according to Kaufman.

The size of that threshold remains to be seen. Kaufman said that while Biden has pledged not to raise taxes on taxpayers with incomes of less than $400,000, setting the threshold at that level would be far too low. “We’re going from a situation where there’s no estate tax on people earning $11 million or less, [and] now all of a sudden we’re going to impose capital gains tax on people down as low as $400,000? That seems a little unlikely to me,” she said.

Kaufman said Canada’s system has been in place for several decades, which suggests it has been “sufficiently successful.” However, the change wasn’t sufficient to tamp down planning to avoid the tax, Kaufman said, adding that there are lessons U.S. policymakers could learn from Canada’s experience if they pursue a similar path.

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Kaufman agreed, saying that if Biden’s proposal becomes riddled with exceptions, those exceptions would drive taxpayer behavior and make the system less effective.

“If you carve out an exception for family farms, all of my clients will buy family farms,” Kaufman said.

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