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Trump Tax Reform: Estate Tax & Generation Skipping Tax

The White House has released President Trump’s tax reform proposal.

As expected (and further to my post earlier this year), the proposal Gift and Estate Taxincludes an elimination of the Estate Tax and the Generation Skipping Tax.

Much has been made about how this will only benefit the “rich”, which may be true as only .2% of all estates pay any Estate Tax. What President Trump’s proposal did not do is eliminate the Gift Tax (which makes no sense whatsoever if there is no Estate Tax), and more importantly, the proposal did not address the “step-up basis” issue.

Under current law the tax basis of inherited assets is “stepped up” to the value on the date of death of the decedent. As a result, all the built up gain in the property escapes taxation when the property is sold. This “stepped up basis” rule applies to property inherited for all estates, not just those few estates that pay Estate Tax.

But will any repeal of the Estate Tax leave the “stepped up basis” rules in tact? Several of the proposals in past years replaced the “stepped up basis” with a “carry over basis” rule. Meaning, those who inherited property also inherited a built-in tax liability when the property was sold. (What was “given away” by the right hand, was more than taken back by the left.)

Thus, if the basis rule is not addressed, and if the “stepped up basis” rule is not retained, the repeal of the Estate Tax will not actually benefit anybody, in fact, quite the reverse—everybody stands to be lose.

We should point out that earlier in the year, the House passed the Death Tax Repeal Act which did address the basis issue, which under the proposed Act would retain the “stepped-up basis” provisions. Why the White House proposal did not address this issue is not clear.

Finally, even if the Federal Estate Tax is repealed….many states (predominately in the north and north east) have their own Estate Tax, and repeal of those taxes does not appear to be on the platform.

If you need tax planning or have a questions about any of the above, contact us.

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