Estate Tax Reforms Possible
Although it’s impossible to predict the details, it’s almost certain that we will see some significant reforms to our tax code within the next few years. A common theme within the leading proposals for reform is the elimination of the estate tax. In order to understand the significance of that change, it’s important to know what the current tax law is with regards to estate taxation. The federal estate tax (or, as is if often referred to as, the “death tax”) is essentially a excise tax on the assets that people own when they pass away, after allowing for certain deductions. For the past several years, the estate tax has been unified with the gift tax (and, to a lesser extent, the generation skipping tax). A large unified tax credit is available to offset the tax that would ordinarily be due on the gifts people make during their lifetimes and the value of their estates when they pass away. This credit is adjusted for inflation annually and currently exempts $5.49 million in combined lifetime gifts and estate property from taxation. In addition, any remaining tax exemption a person has not used during their lifetime can be transferred to a surviving spouse when that person passes away (which is referred to as portability). So, effectively, a married couple could have assets worth nearly $11 million that would all be exempt from any estate tax.
The elimination of the estate tax would not have a practical impact on the vast majority of people. Only a fraction of a percent of the wealthiest people in America own enough assets to potentially face an estate tax when they pass away. For that small percentage, however, the elimination of the estate tax would be significant because the current tax rate on the value of an estate exceeding the exemption is 40%.
Two of the leading tax-reform proposals also advocate for the elimination of the step-up in basis on property owned at death. This change would have much more far-reaching implications than the elimination of the estate tax. To illustrate, under the current tax system, if an individual purchases a property for $100,000 that has appreciated to $400,000 at the time of their death, then that individual’s heirs can inherit that property with the tax basis at its current fair market value. If the heirs later sold that property for $400,000, they would not be liable for any capital gains tax. If the step-up in basis were eliminated, then the estate or heirs would potentially be liable for capital gains on any appreciated property within the estate (some proposals say even if those gains are not realized through a subsequent sale of the property).
On top of the uncertainty regarding the future of the estate tax, there’s a question of long upcoming tax reforms may last. Any extensive tax reform, especially reform that disproportionately favors the most affluent, is likely to only pass through reconciliation, which means that the changes would be time-limited and would have to sunset within 10 years, if not repealed sooner. Our office will be paying close attention to any new developments on the tax front to provide the most effective planning advice we can.
Disclaimer: All materials have been prepared for general information purposes so that can learn more about our firm and services. The information presented above is not legal advice and is not to be acted on as such. While we strive to present accurate information at the time of writing, it may not be current and is subject to change without notice.