On April 28, 2021, the Biden Administration released its FY 2022 revenue proposals. Along with raising the corporate tax rate and the top individual rate, there were also widespread proposed changes to the capital gains tax rate and estate tax.

Under the Biden proposal, transfers of appreciated property upon death, or gift, may result in the realization of capital gain to the donor or decedent at the time of the transfer. Tax may be triggered at the date of the transfer regardless of whether the property is subsequently sold. This would eliminate the “step-up in basis” upon death of a decedent and require a tax be paid on a portion of the value of a gift made.

A $1 million per person exclusion from recognition of unrealized capital gains on property transferred either by gift or held at death would be allowed. This amount would be indexed for inflation after 2022 and be portable to the decedent’s surviving spouse (making the exclusion effectively $2 million per married couple). In the case of gifts, the donee’s basis in property received by gift during the donor’s life would be the donor’s basis in that property at the time of the gift, to the extent that the unrealized gain on that property counted against the donor’s $1 million exclusion from recognition.

Exclusions under current law for certain small business stock, and the $250,000 per person exclusion for gain on a principal residence, would also remain. The $250,000 exclusion would be portable to the decedent’s surviving spouse (making the exclusion effectively $500,000 per couple).

Property transferred by a decedent to a charity would be exempt. Transfers by a decedent to a U.S. spouse would be at the carryover basis of the decedent, and capital gain would not be recognized by the surviving spouse until the surviving spouse disposes of the asset or dies.

Transfers of appreciated property into, or distributed in-kind from, trusts (other than revocable grantor trusts) and partnerships, may be treated as recognition events for the donor or donor’s estate. Valuation is another important concern in regard to a partial interest. The transfer of a partial interest would be at the “proportional share.” Valuation discounts for minority interests will not apply.

These proposals would be effective on property transferred by gift, and owned at death by decedents dying, after December 31, 2021.

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