Published October 29th, 2020 by Budd-Falen Law Offices, L.L.C.
The outcome of the upcoming presidential election stands to drastically impact Americans’ checkbooks. Both the individual income tax rate and the ability to transfer wealth between generations could be greatly affected if former vice president Joe Biden is elected. Not only does Biden intend to raise individual income tax, he also plans to raise estate taxes exponentially by cutting the federal exemption in half, eliminate the “step up in basis” rules, and increase the taxation rate of capital gains.
The “American dream” of financial mobility and generational wealth transfer could be at risk under Biden’s tax plan. With Mr. Biden planning to hit Americans with some of the most extreme raises in estate taxes and capital gains in history, it may be advisable to consider revisiting your estate plan with your accountant and attorney to protect your assets from the drastic increase in taxes.
Capital gains are profits from the sale of either property or an investment. Currently, capital gains are taxed at a preferential rate that can be as low as 15%. Mr. Biden’s plan would raise the long-term capital gains tax to 39.6% for certain households, the largest hike in capital gains tax in history. Essentially, this would make selling property much more expensive for many landowners.
The increase in capital gains tax will also dramatically impact inheritances, especially when combined with Biden’s intended elimination of stepped up basis. “Basis” is essentially the cost of an asset, used to determine the profit on that asset when it is sold. In practical terms, that would be the value of a property at the time it was purchased. Currently, when a person dies, their heir or heirs inherit property at a “stepped up basis,” meaning that the basis is shifted to the value of the asset at the time of death of the owner. So, for example, if a person purchased a property when land values were much lower for $20/acre and the value of the property increased to over $2,000/acre the value of the basis would be stepped up to $2,000/acre for tax purposes. A step up in basis is essential for many in agriculture because the value of land can often dramatically change.
For example, say that a parent purchased 100 acres of land for $2,000 ($20/acre). When that parent died, the value of that land had grown to $2,000/acre or $200,000. Under the current law and a Trump presidency, the child would inherit that asset with a stepped-up basis of $200,000. If the child sold the asset a year later and it was valued at $250,000, the child would pay capital gains tax on $50,000 in profit. Currently, this amount would be taxed at the lower capital gains rate.
Under Mr. Biden’s plan, the heir would inherit the asset at the price that the parent purchased it, or $2,000. So if the heir sold it a year after the parent’s death at $250,000, they would pay capital gains tax at a higher rate of 39.6% on $248,000 instead of $50,000. Even more disturbing, if the parent does not have sufficient records that they purchased the property at $2000, the heir would pay capital gains tax on the entire $250,000.
Additionally, there is speculation that a Biden administration would seek to change the triggering event for capital gains tax. Typically, capital gains tax must be paid when the asset is sold for a profit. It appears, however, that Biden would seek to classify capital gains as realized whenever an asset or property changes hands. This would mean that inheritors would likely have to pay capital gains taxes of up to 39.6% every time the property passes on to another generation. This would kill the agriculture industry and force family ranches to sell out just to pay the taxes. To make things worse, this tax would be in addition to a true inheritance tax that could also apply.
Another significant change to the estate tax scheme that Biden intends to implement is to lower the amount of inheritance that is federally exempt from taxation. The current federal estate tax exemption is $11.58 million per person, or $23.16 million for a married couple. While these limits initially seem high, lowering this exemption will affect farmers, ranchers and business owners that have significant assets, including land, which they hope to pass on to the next generation. The current exemption is set to sunset in 2026, but a Biden presidency would mean that it could be phased out much earlier than 2026.
An estate planning technique that may be employed during life is gifting. A person may gift their entire estate, up to the federal estate tax exemption, during life. Historically, gifting during life has not been beneficial from a tax perspective for farming and ranching operations because the recipient of a gift does not receive a step up in basis. If Biden eliminates a step up in basis, however, gifting may protect the next generation from Biden’s estate tax policies. Ultimately, a Biden presidency could greatly harm multigenerational ranches and farms by killing the next generation with taxes. Simply put, this election stands to drastically change the transfer of generational wealth as we know it. Tax laws and regulations can often change and could dramatically affect the next generation, which is why reviewing your current estate plan with your accountant or attorney regardless of the outcome of next week’s election is advisable.
Katherine E. Merck
Falen Law Offices, LLC
 Katherine E. Merck is an Associate Attorney with Falen Law Offices, LLC with a primary focus on property rights, environmental, and natural resources law. Falen Law Offices, LLC, has attorneys licensed to practice law in Colorado, Idaho, Illinois, Montana, Nebraska, New Mexico, North Dakota, South Dakota, and Wyoming. This article should not be understood to state or imply that any lawyers of this law firm are certified as specialists in a particular field of law. Colorado does not certify lawyers as specialists in any field. The Wyoming State Bar does not certify any lawyer as a specialist or expert. Anyone considering a lawyer should independently investigate the lawyer’s credentials and ability, and not rely upon advertisements or self-proclaimed expertise. This article is informational and is not legal advice. Use of this article or contact with this law firm does not create an attorney-client relationship.
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