Estate Plan Law Changes

It seems that every time there is a tax policy debate, some portion of the estate tax is on the table for change.  A few years ago, the federal estate tax was a political football.  In fact, for one year, there was no federal estate tax because it was allowed to “sunset” (or expire) and Congress was so deadlocked on the issue that they could not get around to fixing it.  In the meantime, a few billion dollar estates passed with not estate tax requiring Congress to step in and reinstate it.  For all of this trouble, the estate tax comprised only 0.7% of tax receipts in 2013.

For 2015, President Obama is proposing to make a change to the federal estate tax.  Specifically, Obama is proposing to change the so-called “step-up basis” rule.  Basis is the cost of an asset and taxes are paid on the gain between the cost and the sale price when it is sold (that is referred to as “capital gains”).  When someone dies, the basis of their assets are “stepped-up” or increased to their value on the date of death so the heirs who inherit the property only pay capital gains when they sell an inherited asset on the gain between the value when it was inherited and the sale price.  Here is how the Bloomberg article linked above explains it:

He would also impose capital-gains taxes on asset transfers at death, ending what the White House calls “the largest capital gains loophole.” Under current law, assets held until death aren’t subject to those levies, creating an incentive for wealthy people to hold onto them. Heirs only have to pay capital-gains taxes when they sell and only on the value above what the assets were worth at death.

The big question, of course, is whether there is any real chance of this proposal becoming law at least in the form suggested by the President.  Congress is unlikely to go along with the idea and, in fact, the Republican leadership actively opposes the idea.  However, the estate tax is often a target of politicians when it comes to tax policy and the constant changes (or threatened changes) just cause confusion and planning problems for people with large estates.

Remember that we have a separate and stand-alone estate tax in Washington so the changes and policy wars in Washington, D.C. does not always affect the terms of our tax here.