The recent national election results have created uncertainty, some may say new hope, regarding the repeal of the federal estate tax. Repeal has had political resonance for many years, even though very few taxpayers are affected. According to published government statistics, 11,917 estate tax returns were filed in year 2015 with only 4,918 of those showing a tax due.
Those taxable returns generated over $17.0 billion in federal tax revenue when the estimated total federal revenue in 2015 was $3.25 trillion. In short, the average estate tax paid equaled $3.5 million per return, while the estate tax represented .5% of federal revenue. From a taxpayer perspective the estate tax is a substantial liability, while from the revenue perspective, the estate tax is immaterial.
Repeal has been presented only as a broad idea, and Congress would consider it in the context of competing tax agendas. Another announced goal for the next legislative year will be reduced federal income tax rates. When income tax rates were lowered in 2001, estate tax repeal was postponed and phased out over a ten year period to take into account projected revenue loss to the government.
The nomination of Representative Mick Mulvaney as director of the Office of Management and Budget may accentuate conflicts among policy makers about replacing lost federal revenue due to estate tax repeal. Representative Mulvaney is known as a “deficit hawk” and proponent of a balanced budget amendment. Proponents of this policy often emphasize “revenue neutrality” in connection with tax legislation.
The President-elect has proposed repeal of the estate tax coupled with a capital gains tax at death on estates in excess of $10.0 million. His proposal acknowledges that estate tax repeal does not exist in a vacuum. Current federal law allows an income tax basis adjustment for property received from a decedent. This basis adjustment eliminates capital gain on appreciation prior to the date of death. A far greater number of taxpayers benefit from the income tax basis adjustment than are at risk to pay an estate tax. The President-elect’s proposal would subject more taxpayers to a tax at death than under current law.
The most recent legislative effort at estate tax repeal in 2010 was coupled with an elimination of the basis adjustment. The unpopularity of this approach was one reason estate tax repeal failed.
Under current federal law inheritances and life insurance proceeds are not subject to federal income tax. Congress may reconsider these income exclusions to offset the loss of federal tax revenue from repeal of the estate tax.
Prior efforts at the repeal of the estate tax have left the federal gift tax in place, with modifications in exclusions and tax rate on taxable gifts. The gift tax was enacted to preserve the integrity of the federal income tax and still serves that purpose. Federal income tax law prevents the assignment of income to lower bracket taxpayers such as minor children. The federal gift tax limits gifts that would accomplish the same result. This independent purpose of the gift tax suggests that it may survive legislative repeal of the estate tax.
As with any announced legislative goal, the devil is in the details. We will continue to monitor legislative efforts to repeal the estate tax and the related income and gift tax proposals as they work their way through Congress. We do not recommend that clients initiate planning motivated by federal estate and gift tax planning until the legislative process becomes clearer.
Recent increases in the federal estate tax exclusion have eliminated tax planning as a factor for many estate plans. The increased exclusion and the current legislative uncertainty have the beneficial effect of allowing clients to give their attention to the more important issues in estate planning: provisions for the surviving spouse and minor children, ultimate disposition of accumulated wealth, continuation of the family business and nomination of fiduciaries to accomplish those goals. We can assist you in addressing these traditional concerns now, apart from any possible change in federal law on the horizon, and revisit tax considerations at a future date.
Best wishes for the New Year!