How Possible Changes to the Federal Estate Tax Policy
Can Impact You
There is much speculation in the press and elsewhere about President-Elect Trump and the next Congress (115th) enacting full federal estate tax repeal. This speculation is largely based upon the public statements of Donald Trump as well as longstanding Republican support for estate tax repeal. But, it is important to understand the realities of today’ political climate and what is being proposed to take its place.
Which proposed estate tax repeal proposal is right for you?
Even if the estate tax is repealed, it will come back with a change of control of Congress. If the Democrats retake Congress after the 2020 census, then you can anticipate an immediate move to reinstate the estate tax. Why? Because they are the party that wants to tax the rich and act like Robin Hood to the poor, and the estate tax is one of the ways of doing so which appears in the best interests of a great majority of American citizens.
The proposals from the Democratic candidates are fairly close across the board —
Lower the unified credit to $3.5 million from the current $5.43 million;
Raise to top rate from 40% to 45 – 55%. (Clinton had actually proposed a 65% rate for estates of $500 million or more);
Do Republicans have sixty votes in the Senate to repeal the estate tax? Not likely. Then, estate tax repeal will have to be done using a procedure known as reconciliation, which imposes significant political, procedural and policy challenges and restrictions. Not the least would be a sunset of the repeal during the budget window which is usually ten years.
What about the Republican’s estate tax repeal proposal?
Essentially, the estate tax proposal as outlined by the Trump Campaign would be the following: repeal the estate tax and replace it with a capital gains tax without the benefit of step up in basis. What does that mean to you?
Step up in basis has been a part of the estate tax law for many years. Upon death, each asset that the individual owns at the time gets step up in basis without having to pay the corresponding capital gains tax. Step up in basis has provided many wealth households with a fresh start on assets, which have been held for a long time.
But what happens when you have a capital gains tax with no step up in basis? Typically, wealthy individuals have hundreds and thousands of assets which have been accumulated over a great deal of time, and there is little substantiation of the basis in those assets. What if you had to go back and determine what was the basis of an asset which has been in your family since the time of your grandfather? It is a difficult law to adhere to, and that is why when Congress previously repealed step up in basis and enacted carryover basis in 1976, it repealed it once again in 1978 because it was just too difficult to keep track.
The highest capital gains taxes at the federal level are:
20% for most capital gain transactions;
25% for real estate or transactions with some form of depreciation associated with them;
28% for closely held stock in family companies;
And, for many of you, there is a tax at the state level as well. That tax can range from 6% to over 12% in some states. Add that tax to the federal tax and you get a tax rate of from the low end of 26% to a high of 40%.
And, what about your basis? If you don’t have good records, you may have to declare that your basis is $0 since you have no other way to prove otherwise. So your effective tax on that asset would be from 26% to 40% with very little to shelter it.
How does that stack up against the current law?
With an exemption of $5.43 million with inflation indexing, most families are able to pass nearly $11 million of assets without an tax on them at all!
For those who have assets in excess of this number, there are any number of tools which allow you to significantly reduce, if not do away with the estate tax altogether. In most cases, our engagements have ll reduce the overall tax bill at death between 0% to 15% of the value of the assets. Just by using the tax law as it exists.
With a capital gains tax and no step up in basis, the tax bill to you and your family could be higher than you thought!
Is that what you really want?
To learn more about your estate planning and tax options, give us a call or visit our wealth management tools and resources