This column first appeared in the San Antonio Express News on October 2, 2017.
On September 27, President Trump announced a nine-page framework to modify the tax code’s 74,000+ pages. Clearly more details must be announced, and should become public when an actual bill is filed in Congress.
Currently, the federal estate tax is imposed when an unmarried person dies with more than $5.45 million in assets, or when the second spouse dies with more than $10.9 million in assets. Such an estate must pay 40% on the excess, but gets to deduct any funds that are left to charity. According to the 2015 Report of the Joint Congressional Committee on Taxation, about 2/10ths of one percent of estates are large enough to file an estate tax return with the IRS.
Flipping that number, about 99.8 percent of Americans already have no federal estate tax. Consequently, repealing the federal estate tax entirely will provide benefits only to the wealthiest of Americans. No one likes paying taxes, and the fairness of having an estate tax – even on just the few most wealthy Americans – can be debated vigorously. The NY Times estimates that President Trump’s family would eventually save about $1.1 billion by eliminating the estate tax.
You ask about the generation skipping tax (GST) and the gift tax. The GST, under current law, is designed to discourage large transfers of wealth from grandparents to grandchildren. If the estate tax is repealed, there is no need for the GST, and the Trump tax framework does state that it would eliminate the GST.
The future of the gift tax is less certain. It is not mentioned in the tax framework. The primary theoretical reason for the gift tax (when an estate tax exists) is to discourage people from giving all their assets to their children before they die. If the assets are given away tax free before death, there can be no estate tax when the giver eventually dies. If there is no estate tax, why discourage gifting? We’ll have to wait to see what the bill actually says when it is introduced in Congress.
As to the step up in basis: again, the tax framework is silent. The step up in basis eliminates capital gain taxes on appreciated assets when they are sold after being inherited. If aunt Sally bought 500 shares of AT&T in 1987 for $11/share (her tax basis) and those shares are worth $38 now, Sally would have a $27 taxable gain if she sold the shares. But if she dies and leaves them to you, your tax basis is stepped up to $38. The capital gain tax is forgiven.
The new tax framework is also silent about changing the step up in basis. However, when he was campaigning for office, Donald Trump proposed eliminating the step up. If that is carried through to a bill before Congress, it could increase taxes on middle-wealth Americans. Again, suppose aunt Sally dies with an estate of $1.3 million. Under today’s law, you inherit it all with no estate tax and no capital gain tax. If the law changes, you inherit it with no estate tax but you will owe capital gain tax if you liquidate her holdings. Upon sale of the inheritance, taxes could increase from zero under current law to about $260,000 if the step up in basis is eliminated.
Contrast that to a mega-wealthy person with $150 million in appreciated assets. Under today’s law, there would be estate tax of about $55 million and no capital gain taxes. If the law changes, there would be zero estate tax and about $30 million of capital gain taxes when the holdings are liquidated (if ever). That is a $25 million tax cut for the mega-wealthy, compared to a $260,000 tax increase for the middle-wealthy.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues via www.TexasEstateandProbate.com or www.Premack.com.