Within the limited confines of the arena of tax professionals, it is fairly well known that the Estate Tax in the U.S. is now 100 years old, and many of those years have been cloaked in controversy. The U.S. is not alone in assessing a tax on the transfer of wealth; at least 19 countries among the worldwide Organization for Economic Development (OECD) impose an estate or inheritance tax. However, the U.S. Estate Tax has regularly been challenged by lawmakers and has changed many times through the years. The “transfer of wealth” phrase used above is intentional because our Constitution prohibits a national property tax, so estate taxes are a tax on the “transfer of property”; a distinction that is completely irrelevant if you or your family incur the tax.
President Trump has not been exactly specific about the particulars of his plan to repeal the estate tax; his proposal includes taxing capital gains on assets passing to beneficiaries and an exemption of $10 million for transfers of small businesses and family farms was mentioned on the campaign trail, but it is unclear if the $10 million exemption is applicable to all estates and whether the tax is assessed when beneficiaries sell assets they inherited, with the transfer, or with the decedent’s final income tax return. In addition, is the $10 million exemption per couple or for each individual? Many questions remain, but, regardless of the settlement of all the unresolved issues, under the proposed scenario the greatest part of the benefit goes to those of extreme wealth because effectively they would receive a benefit of reducing the tax paid with a reduction to a 20% capital gain rate from the current 40% estate tax rate , and 99+% of us could owe capital gain taxes we would not incur under the existing provisions, if the Trump exemption only includes small businesses and farms. Is this the leader who promised to protect the working class? I do have some confidence that fairness will ultimately prevail.
Under the existing rules, including the inflation adjustment for 2017, a deceased U. S. taxpayer owes no estate tax on assets valued at $5.49 million or less; married couples double the exemption so that together they can transfer up to $10.98, nearly $11 million, with no estate taxes. So, with the existing rules, it is estimated that roughly only 0.2 percent of Americans – 2 out of every 1,000 – who die will owe any estate taxes, and all beneficiaries, whether or not taxes are paid, currently get to “step up” basis to the value at the time of the death.
If working class beneficiaries are required to pay tax on a disposition of the inherited assets because of the transferred basis, then most all of us will have a negative impact from the elimination of the Estate Tax. For example, under the current law my mother and father can transfer up to $10.98 million to me and/or my sister without paying any estate tax, and if we immediately or subsequently sell those assets we owe no tax unless the assets have further appreciated since my parents’ deaths. For example, suppose my father leaves me his residence which he built in 1956 on land he already owned, and, in total, the property and house cost him $30,000 and today the property is worth $130,000. With the elimination of the Estate tax, transferred basis estate, and no exemption, if I sell the property, my basis will be my father’s basis (what he paid for it in 1956 – $30,000), and I will have a $100,000 gain and owe capital gains taxes at an existing rate of 20% .
There would be hundred of millions of situations just like the example above, and, most likely, the “norm” would be that the deceased transferor’s basis would not be known, thereby, causing further problems with the tax reporting.
Certainly, the problems and issues as outlined above are not revolutionary; the pros and cons of estate taxes and transferred basis have been debated for many decades. The Republicans would like to repeal the Estate tax and retain the stepped up basis rules, but that scenario is unlikely to come to pass even with the existing Republican control. It is quite likely that some compromise will be negotiated, and, after the last round of surprising results emerging from Congress, any predictions about what the outcome might be would be fruitless at this time.
My hope is that a reasonable solution will be developed and passed, but, even if that occurs, time has shown us it is quite unlikely that any resolution will be permanent.
President Trump and the Republican controlled House and Senate may implement a significant change, but unlike the horror show Grim Reaper, it is unlikely to result in permanent death of the estate tax.