Beth Kaufman Weighs in on Estate Planning Under Biden's New Tax Proposal in Law360

President Joe Biden's proposals to increase the highest marginal tax rate, apply it to capital gains over $1 million and require recognizing transferred gift and estate assets could complicate high-net-worth planning due to uncertainty. 

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Since it's unknown whether and to what extent Congress will adopt these suggestions, it will be difficult for high-net-worth individuals to figure out financial and estate planning, especially since each proposal has a different effective date, said Beth Kaufman, a Member at Caplin & Drysdale.

"This is a really complicated monkey wrench that has been thrown into planning," she said. "It's hard to know at the moment how to plan and whether clients want to rush ahead to get things done before the end of the year or whether they feel like it's too late because the higher capital gains rate could [already] be in effect."

There are several planning options people may want to consider in the wake of the budget proposals, Kaufman said. 

The budget proposes that transfers of capital assets at death and transfers of capital assets by gift be turned into realization events starting in 2022, which differs from the current legal regime in which transfers or gifts do not trigger a realization event. That may mean there could be an opportunity to transfer assets into a trust now to avoid having beneficiaries realize capital gains at the time of transfer, Kaufman said.

Another alternative would be to use the temporary increase of the estate tax and lifetime gift tax exemption to $11.7 million per person, or $23.4 million for those who are married, which was enacted as part of the Tax Cuts and Jobs Act,  (115 P.L. 97)Kaufman said. The temporary increase to the estate tax and lifetime gift tax exemptions are set to expire at the end of 2025.

Under current law, someone can transfer $11.7 million during their lifetime, transfer some portion of that amount during life, or wait to use the entire exception for when the property is transferred at death, Kaufman said. The exemption limit is set to revert to pre-TCJA levels and be cut in half in 2026, but since some lawmakers have proposed it should go down sooner than that, wealthy people want to use that exemption before it disappears if they haven't used it already, Kaufman said.

If people do decide to transfer a gift before 2022 to avoid the realization of capital gains, they need to understand how that decision affects the basis in the assets, Kaufman said. The transfer of a gift triggers a carryover of basis in the asset, rather than a step-up in basis upon transfer of the asset of death, which could be one drawback to making such a transfer now, she said.

Another consideration is that if an individual just gives an asset outright to their children to avoid realization when there are distributions from the trust, then the wealthy parent also loses the ability to escape the 40% estate and gift tax at multiple generations, which could be avoided by putting the assets into a trust, Kaufman said. 

Another option could be to put money into a trust to avoid triggering the 40% estate tax on assets over the exemption threshold, but if Biden's budget proposals become law, then distributions to the beneficiaries would trigger a realization of capital gains starting in 2022.

The realization proposal is especially problematic if someone has already set up a grantor retained annuity trust, or GRAT, in which the grantor transfers an asset into the trust and gets back an annuity equal to the value of the asset transferred, plus a set interest rate published monthly, Kaufman said.

GRATs are often used because the grantor gets the value of the asset back and the beneficiaries get the benefit if the asset appreciates, Kaufman said. However, under Biden's budget proposals, capital gains would be realized when the grantor gets the annuity payments in year one and two, and there would be a realization event for the beneficiaries when they receive the appreciated gain on the original asset at the end of the annuity's term, she said.

What makes these options even harder to sort through is the administration has made numerous provisions in the budget and accompanying Green Book that may never get introduced as a bill, let alone passed, Kaufman said. The uncertainty makes it difficult to plan, she said.

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