Beth Kaufman Talks to Tax Notes on Biden's Recently Released Tax Proposal

President Biden could have taken harsher stances in his proposal to end stepped-up basis at death, but instead chose to make some significant concessions.

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Beth Shapiro Kaufman of Caplin & Drysdale told Tax Notes, “I felt there were a number of things here that were on the generous side” when compared with recent similar proposals, such as the Sensible Taxation and Equity Promotion Act of 2021 introduced by Sen. Chris Van Hollen, D-Md., or H.R. 2286 by House Ways and Means Committee member Bill Pascrell Jr., D-N.J.

Kaufman noted that Biden’s 90-year rule would allow for a much longer period to hold assets than Van Hollen’s proposal, which mandates a realization event for assets held in trust every 21 years, or Pascrell’s bill, which would use a 30-year period. Those proposals also wouldn’t allow for portability of the capital gains exemption, she observed.

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Kaufman also highlighted as a generous approach Biden’s proposal to allow family-owned and operated businesses to defer the realization of gain until the business is sold or ceases to be family-operated.  Another taxpayer-friendly aspect is the description of a provision allowing for a 15-year tax payment plan on assets other than liquid assets, she said.

“I assume that includes hedge funds, and private placements, and angel investors — all the kinds of things that rich people do,” Kaufman said.

Kaufman said the Biden administration, while indicating that it intends to give Treasury and the IRS broad regulatory authority to implement the proposal, also hints that it was “trying to glom onto what they could from existing law. She noted that the green book suggests Treasury would generally use existing definitions in the estate and gift tax rules to define transfers of assets and to value assets, with exceptions.

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That’s not to say the proposal goes easy on taxpayers in every respect.

Kaufman pointed out that Biden’s 90-year rule applies to partnerships and other non-corporate entities, not just trusts — which she said was a “good loophole closer” because trusts are sometimes used interchangeably with other types of entities.

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Biden’s proposal also takes a strict approach on how basis is transferred, according to Kaufman. The green book indicates that the basis of property received by reason of death would be the asset’s fair market value at the time of the decedent’s death, and that a similar basis rule applies to gifted property that is not shielded by the donor’s million-dollar exemption. But for gifted property that is shielded by the exemption, the donee’s basis would be the same as the donor’s at the time of the gift.

“If I’m the parent giving appreciated property to my child, and I use a piece of my exclusion so I don’t actually have to pay capital gains taxes right now, my child doesn’t get basis for that. They still take my basis, and later, when they sell the asset, they have to pay tax on it. It seems like a waste of my million-dollar exemption,” Kaufman explained.

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Kaufman similarly recommended that taxpayers could still transfer assets to an irrevocable trust this year and not have that be a deemed realization event because that aspect would still have yet to take effect. Doing so would let taxpayers avoid the top 43.4 percent rate, and those assets could avoid tax for up to 90 years, she said.

“It seems to me if this were to happen, it would be another year-end scramble for estate planners,” Kaufman said. “Why should this year be different from any other year?”

For the full article, please visit Tax Notes’ website (subscription required).