In light of the recent presidential transition, there has been a great deal of talk about whether federal tax law changes are imminent.  These changes might include a reduction in individual tax rates, limitations on deductions and significant modifications to corporate taxation.  Another possibility may be changes related to estate and gift tax laws.  It has long been a goal of many Republicans in Congress to abolish the federal estate tax.  With the 2001 Tax Act, there was a phase out of the tax over 10 years, but subject to a sunset provision.  Now that the Republicans control the White House and Congress again, it is expected that this issue will resurface.

There is little known about President Trump’s position on the estate tax other than what can be found on his campaign website, which suggests repeal of the estate tax, but apparently the imposition of a form of capital gains tax on appreciated assets (subject to an exemption of perhaps $10,000,000).  While the details are sketchy, it would be perhaps similar to the tax that is employed in Canada.  In fact, it would be somewhat akin to an estate tax, but with a significantly lower tax rate (the current federal estate tax rate is 40%, and the capital gains rate may be half of that).  

Republicans in Congress have generally proposed to repeal the estate tax altogether but to institute a “carry-over basis.”  Under the current law we have a “stepped-up” basis, so that when someone dies, the tax basis for assets included in the estate is equal to the then fair market value (with a few notable exceptions, such as IRA and 401(k) accounts).  For instance, suppose a person owns 100 shares of stock purchased at $10 per share and now valued at $30 per share.  If the stock is sold, there would be capital gains of $20 per share.  If, instead, the stock is retained and becomes part of the person’s estate when it is valued at $30 per share, then the tax basis for the estate and the beneficiaries would be $30 per share, eliminating the capital gains of the stock sold at that price.

It is also not clear whether any of these Republican proposals would repeal the gift tax.  That was an issue in 2001, and the decision was to retain the gift tax out of concern that gifts among family members could be used to reduce income tax (e.g., stock could be gifted by a parent to a child to sell at a lower capital gains tax and then the proceeds could be gifted back to the parent).  

In short, there is still much to be determined.  At this point, we do not suggest making any estate plan changes based on speculation about the future.  Even if the estate tax is repealed, for some clients it might still make sense to engage in gift planning to guard against the possibility that this tax may be reinstituted someday.  In fact, that has happened a couple of times over the history of the federal estate tax.  Once there is some development and resolution in Washington about taxes, we will send out an alert to our clients.  For more information, please contact Peter T. Mott (pmott@brodywilk.com).