On May 28, the Biden administration released its fiscal year 2022 budget proposal, which includes two major legislative plans previously released by the administration, the American Jobs Plan and the American Families Plan. At the same time, the Treasury Department released its highly anticipated “Green Book,” explaining the administration’s revenue proposals for the fiscal year. The Green Book is not the law, but it is already leading to questions about some of the finer points that will affect estate planning.
Estate planners for the wealthiest Americans are hunting for ways to sidestep the potential hit from higher taxes on investment income and the new capital-gains taxes at death. For households that earn $1 million or more, capital gains on investment income would be taxed as ordinary income. And for estates of more than $1 million (i.e., a $1 million lifetime exclusion), Biden seeks to change the tax treatment of wealth that is transferred after the taxpayer dies. In effect, the proposal seeks to tax unrealized gains when an asset is passed on to an heir, as if the asset had been actually sold. Under current law, appreciated assets held until death escape the income tax. Heirs pay capital-gains taxes only when they sell, and only on gains since the prior owner’s death. The proposal, however, does allow family-owned farms and businesses to defer the tax payment.