September 1, 2021
Under current law, there is generally no income or capital gains tax on inherited assets, as their tax basis becomes fair market value on the date of the owner's death. (Note that this rule does not apply to inherited tax-favored retirement accounts.) Accordingly, estate planners may recommend holding substantially appreciated assets until death, so as to secure that tax-free basis set-up.
President Biden called for a dramatic increase in federal spending in the "American Families Plan," to be "paid for" with a restoration of the 39.6% tax rate at taxable income of $400,000 or more, and capital gains would be taxed as ordinary income for those with taxable income more than $1 million. What's more, the President suggested that basis step-up at death should be ended. In a clarifying statement, the Biden administration reported that $1 million in basis step-up would be granted to each estate, so smaller estates would be excused from application of this new rule.
Would the end of the basis step-up mean a "carryover basis" for heirs, as already happens with the federal gift tax? Or could death become a realization event, with a "deemed sale" of all appreciated assets, requiring the estate to immediately pay tax on unrealized gains? Such a dramatic change in tax law would have a tremendous effect on estate planning.
Therefore, this issue that estate planners are watching closely. With the congress closely divided, it is far from certain that any tax increases will be enacted this year. On the other hand, the growing federal deficit need attention, and tax increases on "the rich" may be inevitable.