With a new President coming and with Republicans to control the House and Senate there is a distinct possibility that the estate tax will be repealed. Indeed one expert, Michael Graetz, who teaches at Columbia Law School, is quoted in the Wall Street Journal as saying that “Estate tax repeal seems virtually certain.” Usually pronouncements about future tax law are not made with such certitude, so it may be worthwhile to see just what the President-Elect is proposing.
As of November 9, the President Elect’s plan with regard to what he calls federal “Death Taxes” was that
The…Plan will repeal the death tax, but capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.
Let us examine these positions one at a time.
- First, repeal of the estate tax generally would benefit anyone whose estate at death plus lifetime taxable gifts exceeds $5,490,000.00 (the 2017 applicable exclusion) or in the case of married couples $10,980,000.00. Thus, the repeal obviously does not affect the vast majority of people, while at the same time it benefits handsomely a small percentage of the population, who would avoid a tax at a 40% rate on all amounts over and above the exclusion.
- Second, the capital gains language is a little difficult to parse, but apparently only estates that would have more than $10,000,000 in gain would be taxable. Implicit in this is a fundamental change to income tax law—apparently for these estates the stepped-up basis on death would no longer apply (otherwise there would be no gain to tax). Again, this proposed tax would affect only the estates of the wealthy and, if we are reading it rightly, would necessarily reach even fewer estates than the un-repealed estate tax would reach; plus the capital gain rate (which the President-Elect intends to lower still further) would also be lower than the rate of the estate tax if the latter were to stay in effect. One planning note if you happen to leave such a large estate: in the past it made sense to keep highly appreciated assets in one’s estate to benefit from the stepped-up basis and eliminate gain. If the President Elect’s plan is implemented, such a taxpayer would apparently want to hold on to lower appreciated assets and give away highly appreciated assets. A final point, we assume that the disappearance of stepped-up basis would not apply to all taxpayers, but only applies to estates with $10,000,000+ in gains. This is a very important distinction that bears watching.
- Finally, with regard to the third position, presumably this is aimed at “private foundations” not “private charities” (which is not a category recognized in federal tax law.) Private foundations are generally thought of as vehicles for the wealthy to give away assets to charitable causes. Giving appreciated assets to such a charity is a method of giving value to charitable purposes, while simultaneously saving on capital gain tax. It should be noted that The President Elect’s own Foundation is a private foundation, so this proposal may, at least on its face, appear to cost the President-Elect one method of avoiding capital gain at his death if his plan otherwise is implemented. One would like to think that this was a consciously-made, statesmanlike decision.
The above snippet is only one campaign plank from the President Elect’s website, and its brevity and vagueness probably means we have already lavished too much attention on it. But stayed tuned.