By Ashlea Ebeling
Estate tax foes have been waiting for a Republican president to make repeal happen, and now they have their chance with President-elect Donald Trump. “It will still be a heavy lift but not insurmountable as it has been with [President Barack] Obama in office,” says Palmer Schoening, head of the Family Business Coalition. “Trump made repealing the death tax a key tenet of his tax reform proposal, and we look forward to working with him to see it through.”
Trump’s tax plan calls for repealing the estate tax, and imposing a capital gains tax on assets left to heirs above a $10 million threshold.
President Trump’s First 100 Days:
If estate tax repeal happens, it would be a tremendous gimme to the rich (including eventually Trump and his family). In tax year 2015, just 4,918 estates paid $17 billion in estate taxes (less than 1% of federal revenue). More than a third was raised from the richest of the rich—the 266 estates valued at $50 million or more brought in $7.4 billion to the Treasury. “Maybe Congress will just bite the bullet and say ‘Get rid of the estate tax because it affects so few,’” says Charles “Skip” Fox, an estate lawyer with McGuireWoods in Charlottesville, Va.
Here’s a breakdown of who is paying the estate tax based on recent Internal Revenue Service statistical data for taxable estate tax returns filed in 2015:
|Size of estate||Number of estates||Net estate tax|
|Under $5 million||665||$351,764,000|
|$5 m < $10 m||2,298||$1,928,999,000|
|$10 m < $20 m||1,150||$3,349,538,000|
|$20 m < $50 m||540||$4,062,621,000|
|$50 m and up||266||$7,392,722,000|
Under current law, for 2017, the estate and gift tax exemption is $5.49 million per individual, up from $5.45 million in 2016. That means an individual can leave $5.49 million to heirs and pay no federal estate or gift tax. Surviving spouses can carry over each other’s unused exemptions, allowing a couple to shield just shy of $11 million ($10.98 million) from federal estate and gift taxes. For taxable estates, the rate is 40%. Assets get a “stepped up basis” that allows capital gains to escape taxation if passed to heirs. If you bought stock for $100,000 and it’s worth $1 million when you die, the $900,000 appreciation escapes capital gains taxation—but could be subject to the estate tax depending on the value of your estate.
The Republican hard line position–estate tax repeal coupled with continued stepped-up basis–passed on a 240-179 vote in April 2015. “Realistically, that’s not going to go through,” says Jonathan Blattmachr, an estate lawyer in New York City. By contrast, Trump opponent Hillary Clinton’s latest plan, piggybacking on Sen. Bernie Sanders’ call for a responsible estate tax, was to toughen the estate tax by dropping the exemption level back to $3.5 million per person, and putting in new rates ranging from 45% up to 65% for mega-estates.
And then there’s Trump’s compromise plan. Here’s how it’s laid out on the Trump campaign web site:
“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.”
So there’s a twist—a hint at compromise that’s probably the only way estate tax repeal actually could take place. Basically, it looks like Trump would repeal the estate tax but replace it with what looks like a capital gains tax at death. Under the Trump plan, once estates reach a certain threshold, heirs would owe capital gains taxes on appreciated assets—still that’s a top 20% tax bite, instead of 40%. “If you’re rich, you want to get rid of the estate tax even if you have to pay a capital gains tax,” says Blattmachr.
What’s the road to repeal? “My guess is that any proposal that Mr. Trump offers with the support of the House would face lukewarm reception in the Senate,” says Fox. “Anything on estate tax would have to be part of an overall tax reform effort, a compromise on both sides.”
That’s how we eventually got up to the huge $5 million (indexed for inflation) exemption level in 2010—part of the Tax Relief Reconciliation Act of 2001. In 2013, Congress made that exemption level permanent and indexed for inflation and set the rate at 40%.
So with Trump and the Republican-controlled House on board, one possibility for 2017: Senator Mitch McConnell (R-KY), Senate majority leader, pushes to make estate tax repeal part of an overall tax reform package, and it goes through the budget reconciliation process. Another track: Republicans continue to make gains in the Senate in 2018, and convince more Democrats to go along getting repeal support up to the magic 60 votes (6 current Democratic senators have voted for repeal at least once in the past, Schoening says).
In the meantime, the federal estate tax exemption level keeps going up each year (See IRS Announces 2017 Estate And Gift Tax Limits, and more states are lessening the separate state estate and inheritance tax bite (See Where Not To Die In 2017 for the nine states ushering in changes for 2017).
If you’re wondering about the cryptic line in Trump’s death tax plan that appears to be cracking down on private foundations, I asked charitable giving tax expert Conrad Teitell what it might mean, and he said he has no idea: “It’s nonsense.” So more on that later if I can get Trump to elaborate.