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Draft legislation preserves stepped-up basis

Estate Plan Edge: Proposed estate tax changes save stepped-up basis, and that’s the good news — among the bad and ugly.

Curt Ferguson

September 29, 2021

4 Min Read

You have already seen the news. The House Ways and Means Committee released draft legislation on Sept. 13 that proposes a series of tax law changes. These proposals will not all become law, and some things that are not in these proposals probably will become law. Depending on what the Senate passes, it seems we have the closest thing to a look at what is likely to become law.

There is good, bad and ugly news in the proposals.

The good news. The best news is what is not in the proposal. There is no proposal to repeal stepped-up basis. Many farmers have been very concerned about that. Some of the Biden administration’s requests were not merely to eliminate stepped-up basis, but even to go so far as tax the gain at death.

About a year ago I wrote about how devastating that would be to family farms. That farm worth $5 million, with a basis of $1 million, could have been subjected to about 40% tax on the $4 million of gain as it passed to heirs. That would have been far worse than any estate tax has been since at least the 1990s.

The loss of step-up would not have been as devastating, because it would only tax heirs if and when they sell their inheritance. As long as they kept the land, they wouldn’t incur capital gains tax. Still, most families have non-farmers as well as farmers among the children. Estate plans often include provisions for the farmers to buy out the non-farmers on favorable terms. Without a step-up, the non-farmers would be subjected to more capital gains tax in that process. So, it’s good news that eliminating stepped-up basis is not proposed in this legislation.

The bad news. That news generally surrounds the variety of income tax hikes and the reduction of the estate and gift tax exemption. The estate tax exemption was doubled under the previous administration and now sits at $11.7 million per person. That doubled exemption will sunset in 2026, dropping to half of its inflation-adjusted amount. The proposal would accelerate the drop, taking the exemption down to around $6 million as of Jan. 1.

The top individual income tax rate now is 37%, and the proposal would raise that to 39.6%.  The current maximum tax rate on capital gains is 20%; the proposed legislation would raise it to 25%. Notably missing is any repeal of the $10,000 limit on the state and local tax deduction for individual taxpayers, as that apparently does not have solid support among Democratic leaders.

Most farmers have benefited from the Qualified Business Income deduction, which currently is not limited by a maximum allowable deduction. The proposal would introduce such a cap, limiting the maximum allowable QBI deduction to $500,000 for married individuals filing jointly and surviving spouses, lower limits for others.

While President Joe Biden continues to promise that no one with income under $400,000 will see their taxes increase, we know that all tax increases have a trickle-down effect. Taxing “big business” or taxing “the rich” always means an increase in the cost of doing business and an increase in the cost of goods and services: inflation. Profligate government spending also drives inflation. Everyone will feel the impact of this one-two punch.

The ugly news. This part is something most people might never have heard of. For clients with estates that exceed their estate tax exemptions, a planning strategy involves a tax-free sale of a large part of their estate to an irrevocable grantor trust. The farmer would sell land to the trust, completely tax-free, and then rent the land from the trust. That rental income would be paid to the farmer. The effect was to dramatically reduce the taxable estate prior to death by removing the land. The proposed legislation would end this strategy.

First, the sale to the irrevocable grantor trust would no longer be tax-free. Transferring your land to the trust would trigger capital gains taxes. Secondly, the assets of the irrevocable grantor trust would still be counted as part of the farmer’s estate on death. The proposal would apply to irrevocable grantor trusts created, or sales made to such trusts, on or after the date of the enactment.

Regardless of what tax laws get implemented, estate planning still dictates who is to get what and how. Focus on that while the tax law is being sorted.

Ferguson, an attorney, owns The Estate Planning Center in Salem. Learn more at

The opinions of this writer are not necessarily those of Farm Progress/Informa.




Read more about:

Estate Taxes

About the Author(s)

Curt Ferguson

Curt Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at

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