Family Business Advisory Services

June 25, 2021

What Does the Step-Up in Basis Tax Proposal Mean for High Net Worth Individuals and Family Businesses?

Recently, the Biden Administration announced elements of its tax agenda in the American Families Plan. The Biden Administration aims to make some significant changes to current tax law.

These changes are highlighted by the following:

  • Increasing the top capital gains tax rate to 39.6%
  • Increasing the top federal income tax rate to 39.6%
  • Increasing the corporate tax rate to 28%
Another substantial proposal includes the elimination of the step-up in basis. The potential elimination of the step-up in basis presents an estate planning opportunity to high-networth individuals and family business owners or should at least spur them to contemplate revisiting their estate plans.

What Is the Step-Up In Basis?

The step-up in basis refers to the current tax environment that allows individuals to transfer appreciated assets at death to their heirs at the current market value without heirs having to pay capital gains taxes on the unrealized capital appreciation of those assets that occurred during the individual’s life. In other words, heirs currently benefit from a “step-up” in tax basis of inherited assets to the market value on the day of death, and no taxes are paid on unrealized capital appreciation of the assets.

Biden Administration Proposal

The Biden Administration is proposing to eliminate this step-up in basis. This means that the heir would be responsible for the taxes on the unrealized capital appreciation of the assets being transferred as if the assets had been sold. This would result in a large tax burden on the heir especially when considering that the Biden Administration is also aiming to increase the top capital gains tax rate to 39.6%. Specifically, the proposal would end the step-up in basis for capital gains What Does the Step-Up in Basis Tax Proposal Mean for High Net Worth Individuals and Family Businesses? in excess of $1 million (or $2.5 million for couples when combined with existing real estate exemptions). So, the first $1 million of unrealized capital gains would be exempt from taxes and only the excess would be taxed. However, the proposal does state that “the reform will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.” These protections and exemptions seem to provide some relief for family businesses, but the details of the protections have yet to be specified.

Takeaways

These proposals are certainly not set in stone and may change as the proposals are debated and legislature eventually makes its way through Congress. However, the Biden Administration’s current tax proposals could have a significant impact on the estate planning environment.

The potential elimination of the step-up in basis is yet another reason for high-net-worth individuals and family business owners to make estate plans or revisit their current estate planning techniques. When considered alongside other Biden Administration proposals such as an increase in the capital gains tax and the fact that the increased lifetime gift and estate tax exclusion limits are set to sunset in 2025, now is a great time to have a conversation about planning. Contact a professional at Mercer Capital to discuss your specific situation in confidence.

Continue Reading

Benchmarking Without Context Is Worse Than No Benchmarking
Benchmarking Without Context Is Worse Than No Benchmarking
Benchmarking without understanding context can lead to importing someone else’s priorities into your boardroom. And in family enterprises, priorities are rarely generic. Used carefully, benchmarking illuminates. Used mechanically, it distracts. The difference lies not in the data, but in the discipline applied to it.
Specialty Finance Acquisitions
Specialty Finance Acquisitions
In 2021, there were 21 deals announced with a U.S. bank or thrift buyer and a specialty lender target. This represents a significant uptick from the prior two years and the highest level since 2017. Deals in 2021 were largely driven by a desire to deploy excess liquidity and grow loans. Other drivers of deal activity include efforts to find a niche in the face of competition or diversify revenue and earnings. Through May 19, six deals had been announced in 2022.
When an Old Valuation Becomes a Liability
When an Old Valuation Becomes a Liability
An outdated valuation can create more risk than no valuation at all when it is quietly relied upon in governance decisions. Family businesses that treat valuation as a living discipline, rather than a fixed conclusion, reduce the risk of conflict and misalignment over time.

Cart

Your cart is empty