Budget Tax Proposal

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President Obama's new tax proposal has a number of changes that could drastically impact your estate plan or business. First, it would treat bequests to non-charitable beneficiaries as gain realization events. Currently, there is a step up in basis with no gain recognition.

The outline of the proposal includes:

  • Basis step up, but only because gain is recognized currently
    • This proposal is less favorable than simply denying a basis step up because it accelerates gain recognition
  • Exemption for first $200,000 of capital gain for married couples ($100,000 for individuals)
  • Exemption applies only to gains, not to value of assets transferred, so assets with a higher value could be bequeathed tax free
  • Exemption automatically portable between spouses
  • For couples, no tax would be due until the death of the second spouse
  • No tax due on inherited small inherited family-owned and operated businesses unless and until the business is sold
    • Any closely-held business would have the option of paying the tax on gains over 15 years
  • Bequests or gifts of tangible personal property other than expensive art and similar collectibles would be tax-exempt

Retirement Planning Changes

The new proposal would prohibit contributions to and accrual of additional benefits to qualified plans and IRAs when balances are sufficient to provide an annual income of $210,000 in retirement

  • Current maximum allowable balance would be about $3.4 million
  • Employers with more than 10 employees but no retirement plan would be required to enroll all workers in an IRA (auto-IRA)
    • Tax credit of up to $3,000 for employers with up to 100 employees that offer an auto-IRA

In addition, the administration has recently withdrawn its proposal to tax 529 savings plans.

While it seems unlikely that these proposals will pass Congress, any such changes to the tax code could greatly impact your individual or business. Attorneys at Clausen & Centrich will keep you informed about changes that could impact your estate planning, business or succession planning.