Get Rid of the Death Tax, Right?
So Trump’s proposal is to get rid of the federal estate tax, with no change to the current “step-up” in cost basis at death (to date of death values) for capital gains tax purposes as long as your assets at death do not exceed $10,000,000. It’s that simple. No more tax caused by something as arbitrary (if inevitable) as death.
Not! The devil is in the details (to coin a phrase?). But before we get to that, let me point out that basically an estate tax is to be replaced by capital gains tax under the proposal. OK, so there’s a $10,000,000 exemption. Well, there’s an almost $11,000,000 exemption for couples under the current federal estate tax (plus step up in basis for capital gains tax purposes applicable to ALL assets).
OK, the capital gains tax rate will be lower than the top estate tax rate, and it only applies to the amount above the cost basis. This is true, but the amount of tax will still be at a level high enough to keep the professional tax planners in business (mostly fooling around with valuations and with the $10,000,000 exemption). And because the step-up in basis will not automatically apply to all assets, or even most assets in the case of heavy hitters, the record keepers will be kept in business full time. Presumably an “estate” return will have to be filed at death for large enough estates - like under current law!
Now for some details - or issues presented by the "simple” proposal that need to be resolved. This blogger can think of about 10, but let’s list only a few: - Is the $10,000,000 exemption of a “cliff” nature? I.e. Do you lose it entirely if you exceed it by one dollar? (Don’t laugh: New York has an inheritance “cliff” tax that kicks in for your full estate if you exceed the New York exemption.)
- If it is not “cliff” in nature, how is decided or who decides which assets are put in the above $10,000,000 category?
- Is the $10,000,000 exemption per person or per couple?
- Is the capital gains tax, imposed on the eligible taxable appreciation, to be collected at death (that is, after a period of administration) or when the assets are later (like years later maybe) sold by the heirs?
- Are retirement assets (e.g. an IRA) to be figured into the $10,000,000 calculation (even though they don’t incur capital gains tax)?
The list goes on. Are you beginning to get the picture? And I forgot to mention that for some estates more tax will be paid, in the form of capital gains tax - federal AND state, btw - than under the current federal estate tax regime. Or maybe you more astute readers have figured this last point out. - F.H.S. 1/3/17
