Say It Is So – Joe Biden’s Inheritance Tax Plan May Have Bitten the Dust

Say It Is So – Joe Biden’s Inheritance Tax Plan May Have Bitten the Dust

Ladies and gentlemen of the planning community, and our beloved customers, brace yourselves: we may be facing good news.

We’ve long known that tax increases were coming to town: it was a matter of how much and when. Over this year, lawmakers in Washington, lawmen and outlaws both, have been dueling it out in Capitol back alleys.

This week, the smoke from the gunfight has cleared a mite. The good guys – that’s us – didn’t win cleanly and we took some losses. Yet maybe the worst of our foes kissed the sand.

If you hang around saloons, if only for sarsaparilla, you’ve heard the yarn: President Joe Biden has big spending plans, and in contradistinction to the usual ways of Washington, he wants to raise taxes to pay for the bill. Mind you, he’ll borrow a mite, a few trillion, so if you see him ambling down Main Street, best cross t’ other side, lest you walk away with a wallet drained dry.

One thing Butch Biden can’t abide: today’s tax rules for inheritance. He’s offered to fix ‘em, never mind we never asked him.

If you land on Boot Hill (OK, enough of the West; join me now on Cape Cod), today’s inheritance rules are kind to your soul. The step-up in basis at death revalues your assets to their current value, meaning no capital gains tax for heirs, until and unless they sell them. This is particularly sweet when the inherited holdings are family farms and businesses, which heirs might want to run, and which a big tax bill might kill by forcing their sale.

Joe didn’t like it: he wants death to be treated like a transaction. Here’s the president’s thinking: the step-up should become a ‘carry-over’. The inheritors would take on the original basis (it would ‘carry over’ to them) and pay capital gains tax on any appreciation in value, as determined at the original holder’s death. If this raises their adjusted gross income over $1 million, they also pay the relevant income tax rate on the gain. Don’t forget the Net Investment Income Tax – all told, they could wind up paying 43.4%. That’s quite a bite from your clam roll, pardner.

State capital gains and federal estate taxes might join the wake. It’s too early in my day for whiskey and soda, so we’ll halt right here.

Let’s take a breather; step out on my balcony. It’s a bright morn in September; pine trees are sighing, gulls shrieking and chuckling, and Nantucket Bay glimmering so blue. It’s Indian summer; ignore those far thunderclouds rumbling. I’m reading, because I care for you, a report from the House Ways and Means Committee, titled: “Responsibly Funding our Priorities.” Old gay Saturday ain’t what she used to be.

It might as well read, ‘Crushing Your Thumbs for Your Own Good’, as it’s a list of tax increases the committee wants included in Budget 2022. All manner of corporate taxes will rise; property used for prisons will no longer qualify for REIT income tests, that’s a blow; the top marginal individual income tax rate would climb to 39.6%, as we expected; the capital gains rate for ‘certain high-income individuals’ would bump to 25% (today: 20%) – that’s not so bad, we’d heard threats it would be brought into line with the top income tax rate. A minor point won!

Limitation; increase; surcharge; termination of credits… what a list, *sigh*. Grantor trusts can no longer be used to exclude assets from the decedent’s estate. IRA rules will change, including contribution caps for affluent taxpayers. There’s a 3% tax slapped on high-income individuals, trusts and estates worth $5 million or more – that one will smart like a sand flea.

The IRS will receive $78,935,000,000 to fund tougher enforcement. If you must spend money to make money, how much are they targeting?

Bad as it is, the list lacks one thing, and its nullity nearly breaks out my smile: there’s no mention of the president’s inheritance tax reforms.

Here’s what happened: the Democrats couldn’t garner the support to ensure budget passage if they killed the step-up in basis. I paraphrase party leadership: it’s not a matter of principle; it’s about getting to 218, the number of votes needed to kick the budget to life.

The Demos seem powerful, yet their House majority is slim, and Senate victory is possible only with full party support and a tiebreaker vote from Speaker Harris. They can’t take chances; the president is vulnerable right now, and a few votes – just one in the Senate – could suffocate their dreams. Better to concede one point than lose all.

Something had to give, and the step-up was it. To compensate, the estate and gift tax exclusion will be shrunk to $5 million – the ‘sunset’ will come early. Even this is a relief, as Senator Bernie Sanders was demanding a $3.5 million limit. We’ll take it and call it a victory.

What happened to sway the Democratic agenda? Word from the Hill: the voters protested. Farmers particularly chimed in to protect the step-up. Some representatives thought this was odd, as family farms were specifically excluded from the president’s proposal. I guess some people just don’t trust the government.

Estate planners can look forward to using the still-current inheritance rules for a time. I add one caveat: things could change between now and the final vote, to say nothing of the years ahead. Yet the trend, at least on this point, seems in our favor.

I admit it: we’re biased around here. Taxes, necessary as dentistry, are just as unwelcome. Yet I feel optimistic and even some joy: something went right; we won a skirmish. Emotions like these are delicate things, rather like nitro glycerin. Handle with care, for tomorrow will bring shocks – I encourage you to plan on it.

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