The Biden Budget Plan would subject millions of Americans to a new death tax. Biden’s proposal is to implement a capital gains tax at death on previously untaxed appreciation of asset values during life. Taxpayers with net worths not remotely near the current $11.7 million estate tax exemption would be captured in the net of that new death tax.
The estate tax exemption, the tax-free portion of each individual’s net worth at death has been increased regularly for the past 20 years. With a current estate tax exemption of $11.7 million, very few estates pay death taxes.
Under the Biden Budget Plan, individuals with a net worth of less than $1 million at death could be subject to a significant percentage of their net worth being consumed by the new tax.
The tax would only impact taxpayers owning appreciated assets at death. While it would subject some taxpayers with less than $1 million of net worth to a new tax, there would be millions of others with much greater net worths who would continue to pay no death taxes. The Biden Budget Plan would essentially implement a new death tax for many middle-income taxpayers.
The Biden Budget Plan provides for taxation of unrealized capital gains at death after excluding unrealized gains of $250,000 on a taxpayer’s residence and excluding the first unrealized gains of $1 million (double for married couples). The Biden Budget Plan also includes a proposal to increase the capital gains rate to 39.6 percent for capital gains in excess of $1 million without eliminating the existing 3.8 percent net investment income tax on investment income of more than $200,000.
Expected inheritances passed along by taxpayers at death could be crushed under the Biden Budget Plan. The plan calculates capital gains taxes owed at death without consideration of existing debt.
A school teacher (Mom) who purchased her home in 1971 for $100,000 with the proceeds of her young husband’s life insurance policy has watched her home increase in value to $1.75 million over the course of 50 years. During those 50 years, she placed $950,000 of debt on her home to pay for her daughter’s college, her current and her daughter’s ongoing serious health issues, and other personal activities. Today, she lives in her home with her daughter; they survive financially on their combined pensions and disability insurance.
Under current law, when Mom passes, her daughter will inherit the house without death taxes. Under the Biden Budget Plan, Mom’s estate must pay taxes of roughly $60,000. Mom, with a net worth at death of $800,000 would face a new death tax of 7.5 percent of that net worth.
Another taxpayer (Bob) purchased an apartment building for $550,000 in 1996. Today, it’s his only asset. The apartment building has a fair market value of $3 million, is encumbered by $2 million of debt and because of depreciation, has a tax basis of $50,000. Bob’s net worth is $1 million. At death, with the Biden Budget Plan, he would face a new death tax of roughly $610,000 on his net worth of $1 million, a new death tax of roughly 61.1 percent on a net worth of $1 million. (The tax calculation includes the new Biden proposed capital gains tax rate.)
A married couple developed a family restaurant over a period of 50 years. Everyone worked in the restaurant from their parents at inception to their children as they grew into adults. Today, the business has a fair market value of $5 million. Under the Biden Budget Plan, upon the death of the second spouse, a new death tax of roughly $857,000 would be calculated. (The tax calculation includes the new Biden proposed capital gains tax rate.) The tax would be delayed until the business was sold or no family member was operating the business.
Billy Smith has a net worth of $11.7 million, all cash. He would owe zero death taxes under current law and zero additional death taxes under the Biden Budget Plan, a zero percent estate tax rate.
While Mom would be subject to a new death tax of $60,000 with a $800,000 net worth, Bob would be subject to a new death tax of $610,000 with a net worth of $1.0 million, and the family business would be subject to a death tax of $857,000 when sold, Billy Smith with a net worth in cash of $11.7 million would completely escape death taxes.
The Biden Budget Plan might seem fair to some ivory tower theoretician, but to most, the relative results between taxpayers of different economic circumstance seem bizarre.
Very recently, it has been reported that the proposal to tax appreciation at death is now being considered only for decedents with $5 million of untaxed appreciation at death. While this moves the threshold of taxation up materially, there remains the issue of creating a significant new death tax on those currently not subject to any death taxes. It’s unseemly to change the laws with respect to taxes on death that have been in place for more than 100 years without grandfathering taxes on untaxed appreciation at the date of enactment.
There’s a corollary proposal to eliminate carryover basis at death for beneficiaries. This proposal also creates new death taxes for millions with net worth far, far below $11.7 million. The estate would still face a new death tax, the only difference would be the payment date. The result would remain a new death tax on millions of taxpayers.
While there have been a few academics discussing the concept of taxing appreciation at death, the reality of the Biden Budget Plan hasn’t been widely explained to the American people. It’s hard to imagine that the general public desires to see middle-class taxpayers being subjected to new and substantial death taxes. It’s hard to imagine that the American people would find Mom paying $60,000 of death taxes while Billy Smith pays zero death taxes as equitable taxation.
One may intellectually believe that it’s appropriate to tax appreciation at death or tax that appreciation when the beneficiaries sell the decedent’s assets. But, this hasn’t been the case for more than 100 years in the United States. Congress waking up one morning and determining that it will implement a new estate tax that would include a very substantial proportion of American middle-class estates sounds distinctly like something that would have been considered by King George III in 1760.
