Implications of Obama’s Capital Gains Plans

In President Obama’s State of the Union address Tuesday night, he largely focused on middle class economics.  With a new tax plan, administration officials say that marginal capital gains would increase to 28 percent and eliminate the stepped-up basis of capital gains assets at death. 

The question for financial advisors and their clients is how could these changes affect us and what planning considerations must we subsequently take?  If these changes are passed, advisors serving owners of closely held businesses and clients holding significant, highly appreciated securities would have to rethink clients’ estate plans to avoid leaving heirs huge tax bills. 

If changes to capital gains rules gain traction, advisors should keep in mind that a heavy tax bill could force heirs to sell a business they do not want to sell.  Children with a large bill upon inheritance may not have the liquid assets to satisfy what they owe, forcing a sale of the business that the grantor wished to remain in the family.  While the tax bill is unavoidable, planning to transfer enough liquid assets to cover the costs could prevent this occurrence. 

Advisors must also be conscientious that changes in capital gains rules could mean higher rates of charity donation.  This would be the only remaining way of avoiding the heavy tax bill of highly appreciated securities.  Higher capital gains taxes and elimination of stepped up basis could heighten the incentive to donate those assets to charity. 

See John Nersesian, What Obama’s Cap Gains Plan Would Mean for You & Your Clients, Financial Planning, Jan. 21, 2015.