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President Biden’s Death and Estate Tax Increases

The following excerpts were prepared by the Small Business Legislative Council (SBLC) (ASA is a member of the SBLC) regarding President Biden’s proposed increase to death and estate taxes on small business owners and farmers.  This would be accomplished by reducing the federal estate tax exemption, in some cases increasing the estate tax rate and would impose a new capital gains tax at death.  The new death capital gains tax would be the result of eliminating or limiting the step-up in basis for assets going through an estate and having death trigger the capital gains tax.  It appears for the first time in our nation’s history, at death the same asset could be taxed twice, once by a capital gains tax and again by an estate tax.  In 2010 for one year only, the step-up in basis was limited but as is equitable, the estate tax was repealed.

The elimination of the step-up in basis coupled with death as a triggering event is generally ignored in the debate on the estate tax. It is sometimes referred to as a major “tax loophole for the rich” and is looked to as a significant revenue raiser. This tax would be imposed at the death of the small business owner unless the business was going to be continued by the family.  In that event, the triggering event for the capital gains tax would be at such later time as the heirs sold the business.  Imposing this tax at the death of the owner may cause sales of these businesses because in many cases there will be no other sources of funds available to pay this unexpected tax. Without advance warning there will be little a business owner can do to prepare for this tax, particularly if the owner is a senior citizen with no family members capable or willing to run the business.

Despite President Biden claiming that his tax changes would only affect those who “fly their own jet planes” and have “two or three homes” and “will not affect you” this will not be the case for people with appreciated assets, particularly older individuals who have owned assets for many years.

What about a special exemption for small business and for family owned farms and ranches?

In the past there have been serious discussions about creating an estate tax exemption or at a minimum a significant deferral of payment for estate taxes for small businesses and farmers and ranchers.  If drafted carefully to avoid the complex issues that arose with respect to the QFOBI (Qualified Family-Owned Business Interest) definition, there could be potential support for legislation to exempt small businesses from the estate tax or otherwise reduce the estate tax burden on small businesses. We would applaud those members of Congress who are concerned about the impact that estate taxes has on small businesses, farms and ranches.  However, a simple deferral of the estate tax and the death capital gains, though being somewhat helpful, will not erase the simply staggering amount of taxes that could become due under the Biden proposal. This proposal simply kicks the payment of excessive taxes down the road.

The best way to protect our small businesses is to leave the law as it stands today.

If the new death capital gains tax is to be enacted, then estate taxes should be repealed and all individuals should have a step up in basis as of the effective date of the legislation.

If estate taxes are not repealed for upper middle income taxpayers, any tax paid for the new death capital gains should be offset dollar for dollar against any estate taxes owed.  There should be a much higher exemption of capital gains – at least $10 million so that the upper middle income taxpayers are exempted from the reach of this new tax.  There should be a much longer time period in which to pay the death capital gains tax, particularly for older taxpayers who will not be able to purchase life insurance to pay this new death tax.

If the capital gains rate goes up to the 43.4% level for income over $1 million, the $1 million income level should be determined absent the gain triggered by the deemed distribution forced by the death of the owner of the asset.

Finally, if a new death capital gains tax is enacted then at a minimum the capital gains should be indexed by inflation. When capital gains are taxed on their inflation, the true tax rate is obviously much higher.