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5 Planning Strategies to Use if Biden Repeals Stepped-Up Basis

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Related: How to Help Clients Avoid Capital Gains Taxes 

President Joe Biden’s tax proposal eliminates the “stepped-up basis” on property transferred at death, a move that “reverses a century of tax law” and would have “far-reaching ramifications for investors,” according to Andy Friedman, founder and principal of The Washington Update.

Under Biden’s plan, “unrealized appreciation would be subject to capital gains tax at the time an asset is transferred by gift or bequest,” Friedman explains in a new white paper.

Biden’s proposal “would require a deceased owner of an appreciated asset to recognize capital gain and pay tax on unrealized appreciation that accrued during the decedent’s lifetime,” Friedman explains. “The gain would be recognized at the time of death. Similarly, an owner of appreciated property transferred by gift would recognize capital gain and pay tax at the time of the gift.”

The changes would be effective for gain on property transferred by gift after Dec. 31, 2021, and gain on property owned at death by decedents dying after Dec. 31, Friedman said.

Stepped-up basis, according to Friedman, “has been a staple of the tax policy for many decades,” and “is necessary to avoid imposing both estate and income tax on inherited assets, thereby effectively taxing them twice.”

Repealing stepped-up basis presents challenges. “Recognition of gain on gifted assets imposes a tax before the donor has the sales proceeds to pay,” Friedman said. “And determining a decedent’s basis in assets acquired potentially generations ago can be difficult, especially for assets that are not readily traded, such as partnership interests, real estate, art, cryptocurrencies and collectibles.”

Some Democratic lawmakers are raising concerns about Biden’s plan to repeal stepped-up basis, Friedman said. Even Sen. Bernie Sanders, I-Vt., who has floated legislation to reduce the estate tax exemption to $3.5 million and the gift tax exemption to $1 million, retains stepped-up basis, except for transfers in trust, in his bill, Friedman points out.

The Sanders bill, according to Friedman, calls for a progressive estate tax rate: 45% for estates up to $10 million, 50% for estates up to $50 million, 55% for estates up to $1 billion, and 65% for estates over $1 billion.

If final tax legislation does include a repeal of stepped-up basis, Friedman offers potential planning strategies that he maintains will “blunt the adverse effects.” Check them out in the gallery above.