Is the Death Tax Dead? GOP Proposals to Reform the Estate Tax

by Abby C. Boyd

Both the Trump Administration and the newly seated 114th Congress look serious about a major tax overhaul in 2017. Given Republican control of both houses of Congress and the White House, timing looks good for a significant overhaul of the U.S. tax code.  

President Trump and the GOP have slightly different proposals to reform the code. The Republican plan, titled “A Better Way” is a highly detailed plan released last spring. The 26-page plan can be found here: https://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf. The Trump Administration’s plan has fewer concrete details. The White House has not yet issued information about its tax reform plan, but the 4-page plan issued by the campaign is still available here: https://assets.donaldjtrump.com/trump-tax-reform.pdf.

The two plans are broadly similar. This post will focus on estate, gift, and generation-skipping tax, but for more information on changes to income and business taxes, a simple overview of income tax changes was outlined by CNN on January 9th. That link is available here: http://money.cnn.com/2017/01/09/pf/taxes/house-tax-reform/

Both the White House and GOP in Congress are proposing a repeal of the estate tax. The GOP plan also advocates the repeal of generation-skipping transfer (GST) taxes. The White House is mum on GST taxes. Neither the White House nor GOP have advocated the repeal of the gift tax.

A la the Affordable Care Act, if repealed, would the estate tax be replaced? “A Better Way” does not include any details of a replacement tax structure affecting the estates of deceased individuals. But the Trump Administration has some ideas: namely, a capital gains tax at death. This would eliminate the “adjust basis to date of death value” rule that currently governs a decedent’s assets at death. (Or, at least for those who pay the capital gains tax. The Administration plan is unclear about whether adjusted basis would be eliminated and replaced with a carry-over basis for estates below the exemption.)

What happens to adjusted basis if a capital gains tax is imposed? The current law says that assets at death pass to beneficiaries at the fair market value on the date of death. In this way, assets pass free of any unrealized capital gains tax. For example, let’s say I bought a piece of property for $250,000 twenty years ago. Now it is worth $500,000. If I sold the property when I was alive, I would pay tax on the $250,000 of appreciation. But if I die owning the property, the beneficiary who inherits it can sell the property for $500,000 and pay no tax. There is no gain, as the adjusted income tax basis to the beneficiary is $500,000.   Adjusting income tax basis to date of death value is a major gift from the federal government on asset transfers made by a decedent.

The Trump Administration seeks to eliminate the estate tax and replace the system with a capital gains tax with an exemption amount of $10 million. The plan is not clear whether the $10 million is per individual, per family, or whether it applies only to farms and small business. Because the more-detailed GOP plan does not include any capital gains tax, we are left in the dark about what a possible capital gains tax at death would look like.

The imposition of carryover basis (the basis in life would “carry over” to beneficiaries at death) and a capital gains tax at death would be a significant change to the current system of adjusted basis and an estate and generation-skipping transfer tax. What that system looks like in practice, what exemption amount is set, and whether the common marital and charitable deductions continue remains to be seen.