If president-elect Donald Trump follows through on his campaign promises, the estate tax will be eliminated. Currently, the rules are straightforward: A married couple is exempt for the first $10.9 million in their estate, and they pay a 40 percent tax on the amount above that. Mr. Trump’s campaign proposal seems straightforward: Repeal the estate tax — the "death tax" in his words. There is a second part to his plan which involves keeping taxes on capital gains over $10 million when family assets are sold.
Back in 2012, most tax experts considered the estate tax resolved when the Republican-majority Congress and President Obama reached a so-called grand bargain on taxes. As part of that deal, the current estate tax exemption was set, with annual increases indexed to inflation. With that agreement, more than 99 percent of Americans were exempted from the estate tax. Last year, for example, the IRS processed just 4,918 federal estate tax returns. Few families have more than $10.9 million in their estate.
But Mr. Trump’s proposal is not a simple repeal. His plan also said, “Capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms.” In other words, the tax on capital gains above $10 million would have to paid only when, or if, the assets were sold.
For some accountants, the proposal brought back memories of 2010, when the estate tax briefly expired and assets in a wealthy person’s estate were subject to capital gains tax on the appreciated value. This proved to be a headache. Few people keep sufficiently detailed records to find the original purchase price on stocks or to account for improvements to properties over decades.
Yet the Trump plan, as some attorneys and accountants have read it, would allow the wealthiest heirs to never pay capital gains taxes only IF they do not sell what they inherited. This would be difficult for those with a modest inheritance because they generally sell and spend what they get.
What does this mean for the average middle class to upper class families with less than $10 million in assets upon death? Planning is a requirement for reasons other than avoiding the estate tax. Don't let the news of no estate tax allow you to put off planning since you probably were not subject to the tax in any event. And if you are so lucky to have substantial assets that could trigger the tax, different types of planning will be required.
Posted by Henry (Hank) Moravec III