Depending upon the identity of the declared winner of the presidential election and the composition of the U.S. Senate, it is reasonable to expect some very significant changes to federal gift, estate and capital gains tax laws that directly affect family businesses.
This column identifies some of the most significant, possible changes that were identified as goals by candidate Joe Biden during his campaign.
• Gift tax and estate tax coupled together to be analyzed in total during a person’s lifetime. Currently, one person may give away (while alive or after death through probate or non-probate methods) approximately $11.5 million (adjusted annually for inflation). Currently, the $11.5 million threshold is set to decrease to approximately $6.5 million (adjusted annually for inflation) beginning in 2026. After a person reaches that no-tax lifetime gift limit, pre- or post-death gifts thereafter are taxed at 40%.
The Biden proposal is to decrease the no-tax lifetime gift limit to $3.5 million and tax the giver for pre- or post-death gifts thereafter at 45%.
• Capital gains taxes are generally calculated as the sales price that exceeds the property’s tax basis (usually what was invested to purchase the property).
Currently, if someone sells property (subject to capital gains tax) that the seller owned for a year or less, the gain is taxed at the seller’s income tax rate. If the property sold was owned by the seller for more than a year before sale, the tax rate is 0%, 15% or 20%, based upon the combined size of the gain and the seller’s regular income.
The Biden proposal is to tax capital gains for people who have an income of over $1 million at the income tax rate of 39.6%.
• A key tool of estate planning for many family businesses is the principle that the tax basis can and does adjust (often adjusting upward and called a “stepped-up basis”) as of the date of the owner’s death if someone dies owning that property.
Candidate Biden’s proposal is to eliminate the ability for the tax basis of property to be increased (stepped up) if the owner owns the property when the owner dies.
These changes can seem irrelevant to us because the dollars involved are so large. Few of us in our region have annual incomes of hundreds of thousands of dollars a year.
However, when it comes to capital assets and other property used in family businesses like farms, the money tied up in those assets just to get a “regular return” can be in the multiple millions. For example, a farmer may have a couple million dollars tied up in just 80 acres, a farmstead and a fleet of machinery.
Politics are obviously uncertain and inconsistent, so it is possible that there will be no changes at all to these specific tax laws. And, as long as the rules are known, those affected can plan and adjust accordingly. Nevertheless, family businesses should be ready to contact their financial and legal advisors if/when change comes to these tax laws in particular.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.