Unless you’ve been living under a rock that conceals a vast underground bunker where no television, radio, or internet (especially the internet) is available, you’ve probably heard that we have a new president: Donald Trump. In addition to Trump, both the House of Representatives and the Senate have Republican majorities.
Some of you are no doubt excited about this, some of you not so much. That’s not really what I’m going to talk about today, though. Instead, I want to talk about how Congress and the President might affect estate planning–particularly the estate tax.
Generally, Democrats like the estate tax as a tool to raise revenue for the government from people who have amassed large amounts of wealth (and, the thinking goes, be best positioned to pay a tax). On the other hand, Republicans tend to oppose the estate tax (often calling it the “death tax”) on the grounds that it is double taxation, keeps people from using that wealth to spend/invest/save as they see fit, and threatens some small businesses and farms without the cash to pay the tax. So, with Republicans in charge, could the estate tax be repealed altogether?
The current estate tax
During the Obama administration, Democrats and Republicans worked out a compromise on the estate tax. The Republicans got a higher exemption amount–that is, the amount you can pass before any estate tax is assessed. For 2017, that amount is $5.49 million dollars per person. That amount is adjusted for inflation each year. Democrats got a higher tax rate–40% is the current top estate tax rate (and it’s been as high as 77%).
Estate taxes in the time of Trump
President Trump is on record as saying that he favors a repeal of the estate tax:
“The Trump Plan will repeal the death tax, but capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.” –the Trump campaign website
Of course, campaign promises and actual policy are two different things, but this sounds like a plan to repeal the estate tax. There’s a capital gains tax included in there, although it’s not clear from just that if the capital gains themselves need to be over $10 million or if the estate they are part of needs to be over $10 million. I’d guess the latter, but that’d need to be clarified in any legislation.
But there’s one more issue, and it’s important no matter the size of your estate:
What about the stepped-up basis?
And here’s the part of the estate tax that affects you even if you’re way below the $5.49 million threshold. When you inherit property where there is a basis (usually, the investment someone made to acquire the property), that basis is “stepped-up” from the initial investment to the current value.
Confused? Let’s do an example:
Let’s say that one of your relatives bought 100 shares of stock back in 1972 for $1,000. That relative dies, and you inherit the stock, which is worth $2,000 at the time of death. The original basis in the stock is $1,000. However, you get a “stepped-up” basis of $2,000 on it. If you later go to sell the shares for $2,500, your capital gain is $500, instead of the $1,500 it would have been using your relative’s original basis. This is true whether your relative’s estate was taxed or not.
The property doesn’t have to be stock; anything that appreciates (or depreciates) in value can be affected by this. The step-up in basis is a real tax benefit, regardless of estate size. Additionally, this makes record keeping easier for the recipient–they don’t have to track the original purchase price. However, in the past, repeal of the estate tax has been coupled with ending the stepped-up basis rules.
Of course, it’s impossible to know for sure what Congress and the President will do, but in any discussion of estate tax repeal, the question of stepped-up basis should be addressed.
And, if changes come, that’s a good time to sit down with your estate planning attorney and review whether or not your plan still makes sense.