by  /  Estate Tax, News, Tax Planning

It is timely to consider Mr. Trump and Secretary Clinton’s proposals regarding estate tax reforms to the “permanent” exemptions [$5 million + inflation] and rates [max of 40%] adopted in 2012. The televised presidential debates have centered on more lurid topics, but proposed tax changes may involve significant sums of money and are worthy of note.

Hillary Clinton

  • Restore 2009 estate tax exemption of $3.5 million.
  • Progressive estate tax rates on taxable estates:
    • 45% up to $10 million
    • 50% over $10 million
    • 55% over $50 million
    • 65% 0ver $500 million
  • Close the “step-up in basis loophole” that increases basis of appreciated assets to date of death value, avoiding accumulated capital gains taxes for the beneficiaries of the bequeath.
    • Treat bequests as “realization events,” forcing immediate income taxation of any built-in gains.
    • Exemptions are proposed to limit application of the new rule to only high-income families and to protect small and closely-held businesses, farms, homes, personal property and family heirlooms.
  • This could result in a top marginal transfer tax rate of 80%, the world’s highest:
    • 65% estate tax rate, plus
    • 4% income tax [39.6% marginal tax rate + 3.8% net investment income tax + 4% surtax on incomes over $5 million].

Donald Trump

  • Repeal the reviled “Death Tax.”
  • Stepped-up basis would be ended and built-in capital gains at death over $10 million would be subject to tax:
    • Small businesses and family farms exempted.
    • Contributions of appreciated assets into a private foundation established by the decedent or relatives would be disallowed (to prevent abuse).
  • Few details are enumerated, but presumably if the death tax were repealed:
    • Gift and generation skipping taxes would also be repealed, and
    • There would need to be an inferred carryover basis on inherited appreciated assets that would result in capital gains only upon a future sale or realization event. If not, there would be a deemed disposition tax similar to Secretary Clinton’s proposal, although at a lower 20% rate on assets held more than one year.

Ending “stepped-up” basis may be one of the few matters the two candidates agree upon. This is worthy of note because the loss of basis step-up of highly appreciated assets could result in capital gains tax higher than the estate tax. Depending on the final terms, it could apply to transfer assets in estates of all sizes, even if not subject to estate tax.

Internal Revenue Code Sec. 1014 currently provides for step-up in basis of assets to date-of-death fair market value. Carryover basis of assets (passing the capital gains tax along with the asset) was tried in 1976, but then repealed in 1980 due to the administrative mess of tracking and actually determining carryover basis. Your humble scrivener learned about these nightmares while studying estate tax in law school, only to have carryover basis repealed upon graduation. Perhaps our modern computer capacity will make such calculations more manageable for publicly traded securities where we know acquisition date and cost, but tracking basis of individual head of cattle on the family farm or individual nuts and bolts for the family hardware store might prove more bothersome.

More importantly, beneficiaries have historically received a stepped-up basis, avoiding pre-death capital gains taxes, and have been responsible for only after-death capital gains. Not only will substantial capital gains tax be owed, but this will apply to all estates, whether taxable [large] or not.

Our Democracy survived 2010, when there were temporarily no estate taxes in effect and executors could elect to use a modified carryover of basis rules. Perhaps we will be similarly fortunate with our next venture into carryover basis. What we need to be aware of, however, is that all beneficiaries may be paying capital gains taxes, no matter the size of the estate. We will go from a regime where incredibly few estates are taxable to a new regime where all estates may involve capital gains taxes. This would include portfolios of stocks and bonds, as well as the family homestead. This will turn out to be a much bigger deal than we will be informed of in advance…


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.