Proposed Tax Reform 2021: Wealth Transfer Tax Proposals as Explained by the Department of the Treasury

The recently released U.S. Treasury Department’s Green Book (the Green Book or the proposals) provides information on the Biden Administration’s tax proposals.  This article is part of a series examining the Green Book’s explanations and focuses on the items aiming to increase taxes on account of transfers of wealth by wealthy taxpayers (generally those with wealth in excess of $1,000.000).  

Gift and Inheritance Asset Transfers of Appreciated Property by Individual will Trigger Income and Tax

The donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer.  For a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in that asset. For a decedent, the amount of gain would be the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in that asset. The Green Book appears to indicate that the tax would be borne by the party making the gift or the estate.  Exceptions are provided to the general rule:

• $1,000,000 per-person exclusion (up to $2,000,000 for married couples) for property transferred by gift or held at death; 
• Transfers in death to a U.S. spouse (prominently omitted are transfers to spouses in divorce);
• Transfers to Charity (though certain transfers to split-interest trusts would be taxable);
• Certain Tangible Property - Appreciation on household furnishings and personal effects (but not collectibles) would be excluded; 
• Gain on sale of principal residence - The $250,000 ($500,000 married filing joint) gain on the sale of a principal residence would be excluded;
• Small business stock under section 1202 would continue to be excluded.

While gain on the appreciation of family owned businesses is not excluded, the Green Book does indicate that payment of the tax would not be due until the interest in the business is sold or the business ceases to be family-owned and operated. 

The proposal would also allow a 15-year fixed-rate payment plan for the tax on appreciated assets transferred at death, other than liquid assets such as publicly traded financial assets and other than businesses for which the deferral election is made. The IRS would be authorized to require security at any time when there is a reasonable need for security to continue this deferral. That security may be provided from any person, and in any form, deemed acceptable by the IRS.

OBSERVATION:  The Green Book only mentions that transfers to spouses upon death are tax free.  It does not specifically address whether transfers of property between spouses or incident to a divorce will also be an exception to taxation.  There is some precedence for transfers to spouses causing a taxable event under the qualified opportunity zone regulations.     

Transfers of Property to and from Partnerships, trusts, or other Non-corporate Entities

The Green Book indicates that taxable recognition events will also occur for transfers of property into, and distributions in kind from, (i) a trust, (ii) a partnership, or (iii) other non-corporate entity, other than a grantor trust that is deemed to be wholly owned and revocable by the donor. There is very little additional information provided on the above types of transfers.

Taxing Unrealized Appreciation on Long-Held Assets of Partnerships, Trusts, and Other Non-Corporate Entities is Proposed

Gain on unrealized appreciation would be recognized by a trust, partnership, or other non-corporate entity that is the owner of property if that property has not been the subject of a recognition (taxable) event within the prior 90 years.  The testing period would begin on January 1, 1940. The first possible recognition event for any taxpayer under this provision would thus be December 31, 2030. There is no additional information provided on how this provision would be administered (for example would the tax be paid by the partnership or would the income pass-through to the partners).

Valuation Rules  

A transfer would be defined under the gift and estate tax provisions and would be valued using the methodologies used for gift or estate tax purposes. However, transferred partial interests would be valued at its proportional share of the fair market value of the entire property.  This proposal appears to attack the use of minority interest discounts on transfers of certain property.  How this proposed rule will work in final form is not clear.  For example, would a transfer of some percentage of a family limited partnership interest from a parent to a child fall under this provision.     

If you have any question on the above topics, please don’t hesitate to reach out to your Schneider Downs tax advisor or contact us at [email protected]. 

Related Articles

This article is part of a series discussing the Treasury Department’s Green Book Explanation of President Biden’s Tax Proposals. 

• Proposed Tax Reform 2021 as Explained by the Department of the Treasury
• Proposed Tax Reform 2021: Proposed Increased Individual Income Taxes on High Income Taxpayers