Farmer Brown, a widower, owns the 200-acre family farm he bought from his parents in 1960 for $100,000. Because the farm is located in what was once a rural community and is now a suburban community, the value of the farmland is much higher. If converted into lots for houses, it could fetch for $150,000 per acre. Assume half the land is not buildable, and Farmer Brown is sitting on top of a $15 million asset.

Now comes Senators Chris Van Hollen, Cory Booker, Bernie Sanders, Sheldon Whitehouse and Elizabeth Warren introducing the Sensible Taxation and Equity Promotion (STEP) Act in late March which broadly parallels a similar bill filed in the House. Combined with the proposed changes in the income tax laws, this will have a huge effect on the tax burden on individuals and families in the United States. What’s more, it will be retroactive to January 1, 2021. 

If STEP is enacted, any transfer of property either during lifetime or at death, will realize a net gain on the assets associated with the transfer for income tax purposes. There is an exclusion of the first $1 million of gain at death, but only the first $100,000 lifetime gifts by Farmer Brown will be exempt (except those given to a spouse). Transfers include gifts to trusts (that are not included in the transferor’s estate), making the use of these trusts very costly.

Even if there is no transfer, all future irrevocable trusts would have to report gains on all of their appreciated assets every 21 years; with any trust formed before 2005 reporting and paying taxes on this gain in 2026. Trusts with more than $1 million of assets (or more than $20,000 of gross income) are required to provide a balance sheet, income statement, and list all trustees, grantors and beneficiaries to the IRS annually. This will be a boon for the valuation of hard-to-value assets like art, businesses, land and other unique assets, though there is an itemized deduction for the valuation costs.

Items transferred to charity, spouses, charitable trusts, qualified disability trusts and cemetery trusts are exempt from the tax. Gains on a personal residence would be exempt up to $250,000, or $500,000 for a married couple.

Transfers of illiquid property, such as farms and certain farm assets, would be allowed to pay the tax over a 15-year period. It would be interest-only for up to five years and then ten equal payments for the remaining 10 years. Selling the property would require payment in full. There would be a lien attached to any property which would likely prevent you from refinancing the property without paying off the loan to the IRS. Any transfer tax owed at death would reduce the estate value subject to estate taxes.

There is also no $15,000 annual exclusion per donee similar to the current gift tax rules. This means that parents and grandparents who typically gift assets to their children and grandchildren will eventually reach the $100,000 lifetime exemption amount and have the remaining amounts subject to tax.

Bernie Sanders also proposes significant changes to the income tax. His proposal would add four new income tax brackets for high-income households: with rates of 37%, 43%, 48% and 52%. The Sanders proposal would tax capital gains and dividends at ordinary income rates for households with income over $250,000, and would create a new 2.2% “income-based [health care] premium paid by households.” This is equivalent to increasing all tax bracket rates by 2.2 percentage points, and would raise the top marginal income tax rate to 54.2%.

Now, back to Farmer Brown. He has to pay for a valuation of his property and when they tell him the value (and present the bill for the valuation that is between $10,000 and $15,000) Farmer Brown promptly dies of a heart attack. In his will, he gives his farm to his children in equal shares, all of whom are successful in their professions and are making in excess of $250,000 a year.

So here are some rough calculations:

Total Estate:  $15,000,000
Less Cost Basis:  ($100,000)
Less Valuation Fee:  ($10,000)
Estate Exclusion Amount:  ($1,000,000)
Total Capital Gains Realized At Death:  $13,890,000
Income Tax Due From Children (52%):  ($7,222,800)
Net Estate:  $7,777,200
Unified Credit:  ($3,500,000)
Taxable Estate:  $4,277,200
Estate Tax (At 50%):  $2,138,600
Net After Income And Estate Taxes:  $5,084,200

Will this STEP Act pass? Probably not in its current form. If it passes in any form, however, President Biden, with new $3 trillion dollar infrastructure and child care policies to be funded, certainly will sign it into law. Where there was once certainty about estate taxes, uncertainty reigns and, I predict, many snake oil salesmen will arise to “help” the Farmer Browns of the world avoid this draconian tax.

The Bottom Line: The children are forced to subdivide the farm into house lots and sell off the property to raise the cash necessary to pay the taxes. That is if they can subdivide the property and develop it, as some global warming proposals might restrict any future development of agricultural land near urban centers.

Matthew Erskine is managing partner of Erskine & Erskine in Worcester, Mass., which provides legal and fiduciary services for unique assets.