3 tax proposals that put inheritances in the crosshairs, according to a wealth advisor with 30 years of experience

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  • The rich are in the crosshairs of the new Democratic administration and Congress.
  • There are tax proposals that would upend estate planning for the wealthy.
  • These are the three potential changes that could cost them most dearly.
  • See more stories on Insider’s business page.

Michael Roberts has seen plenty of tax overhauls over his three-decade career in finance.

“Almost every time there’s an administration change, and particularly when there’s a change between parties, all these tax bills and proposals surface, and the estate tax is one that generates a lot of emotion and philosophical positioning from both sides of the aisle,” said Roberts, the president of Arden Trust Company, a firm in Atlanta that has more than $9 billion in assets under administration.

What makes this regime change different, Roberts said, is that a Democratic administration and Senate, coupled with public sentiment in favor of tax hikes on the rich, make revolutionary changes to the tax code more likely.

“I’m not hitting the panic button yet because these proposals have a long way to go in terms of becoming actual legislation,” he said. But his ultra-high-net-worth clients are making changes to their trusts and planning their gifts to prepare for any changes. Most worrying is a proposal that would repeal step-up in basis, a major tax loophole that benefits the wealthy.

“There’s not a whole lot clients can do about that now,” he said.

These three proposed changes are most pressing to America’s richest people, Roberts said.

The For the 99.5 Percent Act would reduce the tax exemption for estates and lifetime gifts

The bill, introduced by Sen. Bernie Sanders and Rep. Jimmy Gomez, would dramatically cut the tax exemption for gifts and estates. Thanks to the tax act that former President Donald Trump passed in 2017, a taxpayer can gift or bequeath $11.7 million in their lifetime before the estate tax of 40% kicks in. For instance, if you gave $12 million worth of assets via gifts over your lifetime and transfers, upon death, only $300,000 — the amount in excess of the threshold — would be subject to the estate tax.

The For the 99.5% Act would cut the exemptions, reducing the lifetime-exemption amount to $3.5 million for estates and to $1 million for gifts. If the act is passed in its current form, a gift of $11.7 million would lead to a tax burden of more than $4.5 million.

The amount of the estate-tax exemption was already due to drop to $5.49 million in 2025, so cutting the exemption a few years in advance is not unreasonable.

“I see that as a very real possibility,” Roberts said.

The bill’s sponsors estimated that it would raise $430 billion over 10 years.

The act would also hike tax rates on large estates

The estate tax, a flat 40%, would be raised to 45% on estates worth $3.5 million and to 65% on estates worth more than $1 billion.

Roberts said it’s unlikely that this would make it into the final bill, as a cohort of Republican senators recently cosponsored a bill to repeal the federal estate tax on estates worth over $11.7 million.

“It is going to need every single Democrat in the Senate, plus the two independents, and Kamala Harris as a tiebreaker,” Roberts said. “That’s a pretty steep political accomplishment when you consider there are a lot of moderate Democrats — such as Mark Warner in Virginia, Joe Manchin in West Virginia, Kyrsten Sinema in Arizona. I suspect there will be some horse-trading within the Democratic Caucus around those specific provisions, and the estate tax is probably going to be one of those.”

The American Families Plan would make heirs pay capital gains tax on assets that have appreciated more than $1 million upon inheritance

The proposed tax hike that concerns most rich Americans is the elimination of step-up in basis, a tax loophole.

Today, if you inherit an asset such as stock or real estate, you can pay the estate tax on its fair market value, and then the cost basis of the asset increases (“steps up”) to that value. If you later sell the asset, you only pay capital gains on the increase on the fair market value at the time of death. The American Families Plan would repeal this step-up in basis and treat death as a taxable event, so heirs would have to pay capital gains tax on the increase in value from when the decedent purchased the asset and pay it upon death, not a sale.

A study by the University of Pennsylvania’s Wharton School estimated that the repeal of step-up in basis combined with an increased top statutory capital gains rate of 39.6%, as proposed by the plan, would raise $113 billion in a decade.

“For ultra-high-net-worth families, the bulk of their net worth is in marketable securities,” Roberts said. “Clearly, with a step-up in basis repeal, and again being due at death, there will have to be some liquidation of those securities to pay for those taxes unless you have bought insurance to pay for it.”

The threshold of $1 million also raises the possibility that it will affect Americans who inherit long-held real estate or stock but don’t consider themselves to be wealthy. Roberts estimated that the repeal would impact more than 200 out of every 1,000 estates.

Roberts urged caution as the plan hasn’t been submitted into legislation yet. It is possible there will be exemptions for closely held businesses or personal residences, and he said there will almost certainly be compromises on the American Families Plan in order for it to pass in a Senate with a slim Democratic majority.

That said, the repeal would be a fundamental change to American tax policy.

“Capital gains have always been a voluntary tax. You only pay capital gains when you make the decision to sell. That’s just been American tax policy since the Internal Revenue Code was first established in 1939,” he said. “To make it an event that happens at death, which is not voluntary, is quite a change from our historical tax policy.”

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