Estate Tax Reform in 2017
Tax reform is on its way in 2017. President Trump and House Republicans have recently released separate tax reform plans with the stated goals of simplifying the tax code and bringing back jobs.
While certainly in the early phases of development, the President’s and House Republicans’ plans for income tax reform are fairly broad in scope. Although both plans would repeal the federal estate tax and neither mentions the federal gift tax, only the President’s plan comments on a potential replacement for the estate tax regime. As such, it is helpful at this point to provide an overview of the current estate tax environment and President Trump’s proposal.
At a very
high level, every United States citizen and permanent resident can protect up to $5,490,000 in value from the federal estate tax at death, and this amount is reduced by taxable gifts made during that person’s lifetime. Thus, an individual with a net worth under this amount should not have to pay estate taxes. For taxable estates, the highest marginal estate tax bracket is an onerous 40%. For income tax purposes, the tax basis of inherited assets is generally “stepped up” to the value of the assets at the decedent’s date of death. That increased basis should reduce the capital gain tax payable upon a later sale of the assets. Certainly many nuances and details exist in this taxing scheme that are not covered here, but this is the foundation of the system.
Under his proposal, President Trump would eliminate the federal estate tax altogether. It appears that the stepped-up basis rule would remain in place, but only for up to $10,000,000 of a decedent’s assets. It is not clear how this would apply in practice. Still, it appears that the only “death tax” potentially generated under Trump’s proposal would be an income tax, which might not be realized until the inherited assets are later sold. As result, the President’s proposal appears to be taxpayer friendly.
Realizing, of course, that any legislation that is enacted this year will differ from the current proposal, it is helpful to be informed about these matters and to remain engaged in the process. Certainly, when questions arise regarding tax reform legislation and your estate plan, please contact an attorney in the Trusts and Estates group
at Ice Miller.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.