What the Looming Election Means for the Estate Tax

Posted By : admin
Category : Estate Administration
22 - Feb - 2016

With the party primaries heating up for the 2016 Presidential election, now is a good time to look ahead to what each of the candidates has planned for federal estate tax.  A snapshot of the current Federal Estate Tax structure (for 2016) is as follows:

  1. If your estate does not exceed $5.45 million, then you’ll pay no estate tax.
  2. If your estate does exceed the $5.45 million exclusion amount, then you’ll pay tax on the amounts in excess at the following rates (with the maximum rate set at 40%):
For Taxable Estates Between … And … You’ll Pay This Amount of Tax … Plus, You’ll Pay This Percentage on the Amount in Excess of the Lower Limit
$0 $10,000 $0 18%
$10,000 $20,000 $1,800 20%
$20,000 $40,000 $3,800 22%
$40,000 $60,000 $8,200 24%
$60,000 $80,000 $13,000 26%
$80,000 $100,000 $18,200 28%
$100,000 $150,000 $23,800 30%
$150,000 $250,000 $38,800 32%
$250,000 $500,000 $70,800 34%
$500,000 $750,000 $155,800 37%
$750,000 $1,000,000 $248,300 39%
$1,000,000 ———– $345,800

40%

 

 

Regardless of your political leanings, if you are interested in estate planning you should at least know where each of the candidates stands.

Democrats:

Hillary Clinton’s plan appears to keep the basic structure of the estate tax intact, however, she proposes to lower the estate tax exclusion to $3.5 million instead of the current $5.45 million, and her proposal increases the top estate tax rate to 45% from the current 40%.

Bernie Sanders takes it a step further, also proposing to lower the estate tax exclusion to $3.5 million from $5.45 million, but increasing the top estate tax rate to 65%.

Republicans:

The top three candidates still vying for the Republican Party nomination, Marco Rubio, Donald Trump and Ted Cruz, have all published tax plans calling for the complete repeal of the federal estate tax.  My cursory internet research turned up no real details on how these proposals for repeal of the estate tax would work.

My thoughts:

All tax “repeals” sound great on their face, but without further details I do have some concerns with regard to a prospective repeal as proposed by the GOP contenders.  With a current exclusion amount of $5.45 million, most estate are not taxed at all.  However, even though they do not actually pay any estate taxes, they are still entitled to a step-up in cost basis to the fair market value as of the decedent’s date of death.  This allows the heirs to inherit the property without having to also inherit the decedent’s cost basis which may be much lower than the current fair market value.  The result is that the heirs avoid the ticking capital-gain time-bomb that would have exploded had the decedent tried to sell that particular item of property before the death and subsequent step-up in basis.   If the estate tax is repealed entirely, this often-taken-for-granted step up in cost basis may or may not be repealed along with it.  This would hurt those estates which wouldn’t currently be required to pay any federal estate tax, but still benefit from the basis step-up.  For most estates that don’t exceed $5.45 million, the heirs would be better off with the estate tax still in existence because not only did they skate under the taxable threshold, but they also got the (sometimes huge) benefit of a basis step-up.

I will be staying tuned to see what details emerge from the campaigns regarding these proposals as the election draws nearer.  If you are a resident of Indianapolis or central Indiana and would like to meet with Gregory Halcomb regarding your estate planning needs (including wills and trusts) please contact Halcomb Singler, LLP, or click here.