Will the death tax finally be put to rest? In this second in a series of articles on changes on the horizon as a result of the Republicans controlling the White House and both Houses of Congress we will explore the possible changes in the estate and gift tax rules. This will be a brief overview of these possible changes and the impact on your estate planning. Should these changes be signed into law, you will need to be prepared to take action with your tax and legal advisors to modify your plan and update your documents.
What We Know
There is a real chance that the Republicans will finally get there way and repeal the estate tax and the generation-skipping transfer tax. They have long seen the law as a double taxation and penalty for those who have accumulated wealth. There will be significant push back from the Democrats who see repeal as benefiting only the wealthiest in our country.
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The President has called for taxing pre-death appreciation in the capital assets of the large estates. This would target individuals with appreciation greater than $5 million and couples with greater than $10 million. Capital gains in excess of these exemptions would be subject to an as of yet undetermined tax rate potentially imposed at death. Presumably the current capital gain rate of 15% or 20% would be used. The date of death value rules would likely be preserved for heirs of small estates less than the exemptions. In addition, there appears to be a desire to create an exception to this tax from being applied to family farms and small business. We also see the possibility that contributions of appreciated assets to a private charity established by the decedent or the decedent’s relatives would be disallowed to prevent abuses.
When will this be applied?
What is unknown is whether this tax will be applied at death or if the heirs will pay capital gain tax when they sell the inherited asset with the decedent’s original basis. For the latter, and what we believe the most likely, rules were created in 2010 when the estate tax was repealed for that year and presumably could be applied again here. In fact, these rules are still on the books, albeit for only the 2010 tax year. Including forms and instruction created by the IRS for that year. The idea is to limit the step-up in basis for heirs who inherit assets from these large estates.
Don’t Say Farewell to Everything
We expect the gift tax rules to survive in some form. It acts to help prevent income shifting from donors in high tax brackets to donors in lower tax brackets. Should the Republicans be successful in eliminate the estate tax, we look for them to impose a lifetime gift tax exemption similar to the last time the estate tax was repealed, somewhere around $1 million. They would also preserve the current annual exclusion of $14,000. We believe both will be indexed to inflation as the current annual exclusion amount is.
Taxpayers have been faced with a historically unusual situation over the last several years. The income tax rate for some may have been higher than the estate tax rate. Many estate plans were reconsidered as a result of this comparable change. Should the Republicans be successful in their income tax reform and fail to repeal the estate tax, it would likely require another review when income tax rates fall below the estate tax rates.
Patience
The estate tax repeal may not be instant. The last time the Republicans tried to repeal the estate tax they did it gradually, with increasing lifetime exclusion amounts lessening the number of decedents’ estates subject to the tax until the full repeal occurred. And with any law, future leaders may re-enact the tax. We will continue to monitor events and update you as those events warrant.
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About the Author
James Snyder, CPA, CSPM is a principal at YHB in the Leesburg, VA office. He provides income and estate planning services, business consulting, and estate and trust administration services to successful individuals in many professions, especially engineering, law, technology and real estate. He also provides strategic guidance and planning for clients involved in stock option transactions and wealth transfer.
