This proposal, inaccurately named the American Families Plan imposes a brand new never before levied tax on property transfers occurring as a result of either death or gift. This new tax, beginning in 2022, would treat the transfer of appreciated property at death or by gift as a sale subject to capital gains tax.
Currently, if you inherit property such as real estate, no capital gain tax is triggered until the actual sale of the property. Under this new tax, cap gains tax would need to be paid, even though the property remains unsold.
This is a nightmare of gargantuan proportions.
Let’s use an example. We have an entrepreneur who is a second generation owner having worked in the business his entire adult life. His father started the business after coming home from VietNam. The principal assets of the business are a building, machinery, inventory and client list, which at the date of death was valued at $4,000,000.
The decedent’s basis in the property after depreciation and other factors is only $250,000. There is a $1,000,000 exemption in this new tax, which means that no one has to pay any tax on transferred property as long as the gain is less than $1M.
This means that the son must now pay capital gains tax on $2,750,000. Assuming a Federal and State combined capital gains tax of 20%, that’s a tax due of $550,000. If his income that year is greater than $1M, he would have to pay regular income tax rates on the capital gain. Given the graduated income tax system and the new upper rate of $39.6%, that would probably be a tax of at least $900,000.
Let’s remember that no sale has occurred. This guy doesn’t have any money with which to pay this tax. What’s he going to do? How is he going to come up with this kind of money? He’s going to need to sell part of his inheritance.
They were nice enough to specifically exclude transfers to spouses and charities from this insanity.
Let’s remember some history. The estate taxes were one of the biggest problems in the taxation system of recent history. Bush The Second began dealing with it by increasing the exemption back in 2002 to $1M. Since then it has increased under various administrations to the current exemption of $11,700,000.
Prior to this, you had family farms and businesses that had been in the same family for the last hundred years being sold to pay the estate taxes. Many don’t realize that Wrigley Field was sold for this purpose.
When William Wrigley passed, the family had to sell off everything they had other than the business and their personal home to pay these taxes. The same thing happened to Elvis. The reason we can now tour Graceland is the same story.
If this nightmare passes and is signed into law, it starts all over again.
Let me leave you with this.
We knew they were coming for our money, but never expected anything as frankly mean spirited as this. I don’t know if they’re serious, deranged, or just trying to use this as a negotiating chip with the other side to get what they actually want.
What I can tell you is that this is frightening.
Prior to the estate tax exemption increases, there were great difficulties in our country with the second or third generation being able to carry on the family tradition of operating the family business.
The really scary part is that this is triggered either by death or gift.
Prior to this, if one generation didn’t want the next generation to sell off most of the business when they passed, they would give small portions away annually in a completely non-taxable fashion. But you can’t even do that with this new tax. You’d pay the same ridiculous tax either way.
Let’s hope that this insanity doesn’t go anywhere.
We’re all going to get through this. Let’s get through it together.
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