High-net-worth clients could see some of the most substantial transfer tax increases in their lifetime if the proposals in President Joe Biden's American Families Plan become law. According to Tax Foundation calculations, taxes on transfers of accumulated wealth at death could rise to around 61% for the wealthiest taxpayers — the largest tax increase in more than a century.
While the wealthiest families would bear the brunt of the estate tax burden, even moderately well-off families could see significant increases in their overall tax liability on postmortem transfers under the latest proposal. Now that the dramatic details have emerged, the question becomes: Are your high-net-worth clients prepared for what's to come?
The Current Estate Tax Regime
Under current law, taxpayers who own appreciated assets can often transfer those assets at death without recognizing any gain. If sold, capital assets held for more than one year are subject to a maximum long-term capital gains rate of 20%. Upon sale, the 20% rate (23.8% when the investment income tax is factored in) is applied to the difference between the sale price and the basis in the property (usually, the original purchase price plus any capital improvements made during the owner's life).
When assets are transferred at death, however, the recipient benefits from a step-up in basis. The original owner's basis is "stepped up" to the fair market value of the property at the date of death. If the beneficiary later decides to sell the property, capital gains are owed only on appreciation between the date of the original owner's death and the date of sale.
A simple example can illustrate. Assume Ada is an entrepreneur who started her own business in 1990. Over 30 years, the value of the business has soared to $100 million. When she died in 2020, she left the business to her son, Jake. Under current law, when Ada died, Jake's basis in the business would be "stepped up" to present-day fair market value ($100 million). In other words, Jake wouldn't be liable for any capital gains taxes at death — he would be liable only for capital gains if he later sold the business at a higher value.
Biden's Proposed Changes
The Biden tax plan would eliminate the stepped-up basis rules. However, in a surprise move, any unrealized asset appreciation would trigger taxation on the date of the original owner's death — regardless of whether the beneficiary actually sold the property.
