American Families Plan: Treating Transfers of Appreciated Property on Death or by Gift as Realization Events

• June 7, 2021
• Carey M. Heyman, CPA

A transfer of appreciated property would be considered a taxable, realization event under President Biden’s American Families Plan. The Treasury Department’s “Greenbook,” which was released over a week and a half ago, devoted more than two pages to this part of President Biden’s proposal (as compared to a paragraph or two).

While there is a lot to unpack here, I am hoping that the following will help explain how the imposition of tax on appreciated assets would be determined under President Biden’s proposal:

• For a decedent, the gain would be calculated by determining the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in the asset.
• The gain upon a gift would be similarly calculated as of the date of the gift.
• Gains on property transferred at death or by gift would have an exclusion of up to $1 million per taxpayer. The per-person exclusion would be portable to the decedent’s surviving spouse under the same rules that apply to portability for estate and gift tax purposes, thus making the exclusion $2 million for married individuals filing a joint return. The exclusion would be indexed for inflation after 2022.
• Gains on tangible personal property such as household furnishings and personal effects would be excluded.
• Residences (expanded from principal residences) would have an exclusion of up to $250,000 per taxpayer with portability to the surviving spouse, making the effective exclusion $500,000 for married couples.
• Transfers by a decedent to a U.S. spouse would carry over the basis of the decedent. A capital gain would not be recognized until the U.S. surviving spouse disposes of the asset or dies.
• Transfers by a decedent to a charity would carry over the basis of the decedent. No taxable capital gain would be generated by the transfer.
• Transfers of property into, and distributions in-kind from, a trust, partnership, or other non-corporate entity (other than a grantor trust that is deemed to be wholly owned and revocable by the donor) would be deemed as recognition events.
• The deemed owner of a revocable grantor trust would recognize gain on the unrealized appreciation in any asset distributed from the trust to any person other than the deemed owner or the U.S. spouse of the deemed owner, other than a distribution made in discharge of an obligation of the deemed owner. All of the unrealized appreciation on assets of such a revocable grantor trust would be realized at the deemed owner’s death or at any other time when the trust becomes an irrevocable trust.
• The recipient would receive a basis in the property equal to the value on which the capital gains tax was computed.
• The payment of the tax on the appreciation of certain family-owned and -operated businesses would not be due until the interest in the business was sold or the business ceased to be family-owned and operated.
• The full cost of appraisals on appreciated assets would be deductible.
• The Treasury Department would be granted significant authority to introduce rules and safe harbors in order to ensure consistent valuation and reporting.
• The proposed effective date would be for property transfers after December 31, 2021.

As mentioned in our last blog post, some modifications are expected to the American Families Plan as it works its way through Congress. Please subscribe to the blog, visit CLAconnect.com and register for our Livestream Series for continued updates and analysis.

Source: Treasury.gov

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