High Noonish – Biden’s Capital Gains Death Tax Proposals Take Shape

High Noonish – Biden’s Capital Gains Death Tax Proposals Take Shape

Misinformation, disinformation, phony news, anonymous sources – there’s a Spanish battlefleet right off our coast!

If William Randolph Hearst – or was it Charles Foster Cain? – says so, it must be true. Why would he lie?

Reporting on a political candidate’s proposals can make you an unwitting disinformation agent. They say what is needful, but what they’ll do if they win is a mystery. We report what we see and try to analyze, knowing full well it could be smoke and mirrors.

We’ve been covering Joe Biden from his whistle-stop mumblings to White House pronouncements. I try to get it right, but on occasion, what he’s saying isn’t clear, or more properly, is amorphous: a declaration on Monday, in play by midweek, on Friday he’s spun round in his seat.

It’s all his fault: he’s the president, that’s the rule. The Buck Stops There. Yet the process itself isn’t bad, it’s how the Washington bulls run, but it’s confusing and surely concerning. How can you plan if they blow with the wind?

Take Mr. Biden’s myriad proposals to brush up tax policy. He sees loopholes for filling, fair shares going unpaid by the wealthiest citizens, hard-strapped working stiffs who need a break – but are we getting one? It’s DC, after all – in the best of times, we don’t get straight talking.

Biden’s tax proposals compound, making me wonder: how many times can you tax a person at death? Eliminate the step-up, cut the estate tax exclusion, raise the capital gains rate – I’ve lost track of his plans, shifting like sands. Let’s try once again to sum up Joe’s thinking.

What does Joe Biden intend to do to increase taxation at death? He talks about equity, making the system fairer for all. Yet the ‘Great Leveler’ isn’t Joe Biden: it’s a spirit, armed with a sickle, and there is no exemption. The IRS knows it: when you’re gone, it’s too late to fight back. In life, though, we can struggle, maybe more on that later.

So, one thing at a time. Let’s focus today on a hot-button, cold-sweat issue: taxation of capital gains at death. On April 28, the White House issued its fact sheet on the American Families Plan, a name coined to lull us into a false sense of security, as usual. One heading bugs me: “Tax reform that rewards work – not wealth”, which prompts me to note that wealth comes from work. Ah, Joe would say, but that’s your reward, and your heirs didn’t earn it. It’s like he’s trying to steam me with his reasonable, still-arguable answers. Let’s save this debate for another date – it won’t be going away.

I’m getting peevish, which breeds unfairness. Let’s hear Joe’s exact words, as written: his taxation proposals aim to “ensure that high-income Americans pay the tax they owe under the law – ending the unfair system of enforcement that collects almost all taxes due on wages, while regularly collecting a smaller share of business and capital income.”

If these words aren’t conducive to your good digestion, consider the thoughts of wiseacre Yogi Berra: “If you don’t know where you are going, you might wind up someplace else.” Your spirit won’t rest if your heirs land in tax court – I’m certain it works that way.

Can you be more specific, Mr. President. Alas, he can: “The plan will also eliminate long-standing loopholes, including lower taxes on capital gains and dividends for the wealthy, that reward wealth over work.” He rather misstates the workings of our economic system, but he’s trying to win the argument, so form beats out fact.

There’s a lot in his fact sheet, so let’s draw back to focus: Joe wants to tax the appreciated value of unsold assets when the holder of those assets dies – the step-up in basis would end. In effect, the tax code would treat appreciated assets as though you’d sold them at death, thereby forcing your estate to pay capital gains tax. Doubling down, the president told Congress in April that he wants to top capital gains rate to rise from today’s 20% to 39.6%, matching his top-rate income tax proposal.

Giving those appreciated holdings to heirs while you yet breath wouldn’t work: they would be taxed as if you were dead, a cold splash in the face to still-mortals, yet sensibly in line with the president’s motives. If the plan becomes law, our old hideouts would be compromised. Joe means it, it seems.

Mind you, there are exceptions. The first $1 million of unrealized gains would be exempt, double for married couples. You could transfer these assets to a spouse, tax deferred until he or she dies or decides to sell them. There is also an exemption for gifts to charity, so the proposal isn’t all heartless.

The venerable $250,000 exemption (doubled for marrieds) on the sale of a primary residence, the wonderful rule that set my mother up for secure retirement, would remain. Some tangible property, like treasured personal items or furniture (mother did well selling dad’s recliner), would be exempt, too.

Other personal property, like precious collectibles, would not be exempt, so don’t expect your collection of Byzantine drachmas or rare Beanie Babies to remain whole post your parting.

These proposals are feared by family business owners, which could be killed by a tax bill when passing from one generation’s hands to the next. Biden proposes to handle this problem by deferring the death tax to a hypothetical sale, where the firm passes out of family hands. Reasonable thinking, I suppose, if still unpleasant in prospect.

High-value assets that are not publicly traded, like art, life insurance, physical gold or mom’s diamonds would face the tax, but the payments could be spread over 15 years. I’ve written before about my friend who owns a ‘missing’ Matisse – it’s the size of an iPad, priceless beyond appraisal. It’s nice to know it could stay in the family, ever lovely and hidden – and that Joe can be reasonable, if only a bit.

Trusts and partnerships would face their own special rules, which we can ignore, since that’s a whole other kettle of fish. This is the gist: the old ways of fending the tax man at death may soon be history.

These changes if enacted would create a veritable death tax. I’m still waiting to hear the president’s ideas on cutting the estate tax exemption ($11.7 million) and possibly raising the top rate (40%), another big whammy on the near horizon. When Joe floats it, we’ll discuss it. Given what we know, though, there’s plenty to rue and to stew on with our estate planners today.

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