No More Estate Tax? No More “Stepped Up” Tax Basis?
Now that the dust has settled on the grueling and seemingly endless election cycle, voters’ minds turn to policy and wonder what (if anything) will come of the promises made by the candidates:
Now What Happens?
For decades, the Republican Party has railed against the so-called “death tax”, calling for complete repeal of the federal estate tax. The policy arguments in favor of repeal range from “job creation” to “I’ve already paid tax on my assets: why should I pay tax again when I die?” The Democrats argue that the estate tax prevents family dynasties and promotes the distribution of property. The historic result? While the federal estate tax still exists, the amounts exempt from estate tax keeping increasing (when I started practicing law in 1978, the federal estate tax exemption was $134,000; the exemption in 2016 is $5,450,000).
Now the Republicans control the White House, the Senate, and the House of Representatives and have the ability to push through their legislative agenda, including estate tax repeal. While the Senate Democrats have the ability to filibuster legislation which does not have the support of at least 60 Senators, we would be surprised if the Democrats choose to expend their limited political capital resisting estate tax repeal.
But, there may be more to the story: under current law, assets which are included in an estate for estate tax purposes also receive a “stepped up” tax basis for income tax purposes. Example: Dad bought 100 shares of IBM stock for $10/share back in the day, and the stock is worth $162/share when Dad dies. If Dad had sold the IBM stock while alive, he would have paid capital gains tax on a gain of $152/share. If Dad’s estate sold the IBM stock after his death, there would be no capital gains tax due on a sale price of $162/share or less. There is a possibility that if the federal estate tax is repealed, the “stepped up” tax basis might go away as well. If so, Dad’s heirs would pay the same capital gains tax as Dad would have and a massive tax advantage would be lost.
And, don’t forget about the states! Minnesota taxes estates valued at more than $1,600,000 for persons dying in 2016 (rising to $1,800,000 in 2017 and $2,000,000 in 2018). Any excess over the exempt estate is taxed at rates ranging from 10% to 16%. While Minnesota Republicans captured the legislature, DFL Governor Mark Dayton has the ability to slow or stop estate tax repeal in Minnesota.
Planning in the Near Term
Estate planning advice in the near term, as far as estate taxes are concerned, for most individuals will be to wait and see what happens. An immediate and full repeal of the estate tax could open up new planning techniques for many clients, and gifts that are made now are not reversible. Any high-wealth individuals contemplating making large gifts or establishing irrevocable trusts for avoiding the federal estate tax should likely sit back and see how everything settles out.
When changes are actually made, it would be a good idea to seek advice from an estate planning attorney and other advisers to determine how it will impact your particular situation. Existing wills and trusts would need to be reviewed and possibly updated. Estate planning documents that have QTIP/marital deduction and credit shelter trusts for estate tax purposes may need to be replaced with a more flexible plan. Irrevocable trusts established for estate tax avoidance should also be reviewed to weigh the options.
So, stay tuned!
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