Proposed Bill Would Treat Gifts and Testamentary Transfers as Constructive Sales for Capital Gains Purposes

On March 29, 2021, Senator Chris Van Hollen (D-MD) released a discussion draft of the Sensible Taxation and Equity Promotion (“STEP”) Act.  According to press reports, the proposal is supported by fellow Democratic Senators Elizabeth Warren (MA), Sheldon Whitehouse (RI), Bernie Sanders (VT), and Cory Booker (NJ).

The discussion draft is lengthy; the following will only summarize most of the more significant provisions.  The legislation would treat the gift or testamentary transfer of appreciated assets as a realization event for capital gains purposes.  Transfers to spouses or to certain trusts for the benefit of a spouse would be excepted.  There is a $100,000 lifetime exclusion for gains and a $1,000,000 exclusion at death (reduced by any use of the $100,000 lifetime exclusion).  The proposal would except an item of “tangible property” that is not a collectible, used in a trade or business or §212 property (property held for investment).  For non-grantor trusts (that is, a trust that is not treated as the alter ego of the grantor for income tax purposes), there would be periodic deemed sales.  There is a provision that deals with grantor trusts: in a nutshell, there would be a deemed sale at the grantor’s death if assets were not transferred out of the grantor trust during life (which would be treated as deemed sales at that time).

The changes are retroactive to the first of this year and there is a severability clause in apparent anticipation of the constitutional challenge to the retroactivity.

On March 29, Representative William Prescell, Jr. (D-NJ) introduced H.R. 2286, which would also treat lifetime and testamentary gifts as deemed sales (there is no short title for the bill).  The bill is similar to the STEP Act in many respects.  It would, however, be effective to post-December 31, 2021, taxable years (thereby avoiding the constitutional issue if enacted this year).

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