As the laws change, we strive to share how they will affect our clients and readers of this blog. Thus, we are pleased to share the following guest post by Florida Bar Board Certified Wills, Trust and Estate Planning Attorney Eric Gurgold.
The Tax Cuts and Jobs Act does not repeal the Federal estate tax. Instead, the Act doubles the amount of wealth that is exempt from the estate tax. In 2018, the new estate tax exemption will be $11,200,000 per individual. A married couple may be able to shield $22,400,000 from Federal estate taxes. The exemption is indexed to increase each year with inflation. However, the changes to the exemption will sunset and revert to today’s numbers after 2025.
Given the high estate tax exemptions, it is possible that not enough estate taxes will be paid to justify retaining the Federal estate tax; and Congress may repeal it.
Would Repeal of the Estate Tax be Good for Your Bottom Line?
One of the benefits included in the current Federal estate tax law is that all assets included in the gross taxable estate are entitled to a step-up in basis. Thus, taxpayers who have low basis assets will pass those assets to their heirs at death with a new basis equal to their fair market value on the date of death.
For example, if a decedent owned $4,000,000 worth of Coca-Cola stock with a basis of $500,000, the decedent’s heirs would now inherit the Coca-Cola stock with a basis of $4,000,000. If they were to sell the stock the same day, no gain would be realized; and because there is not a profit, no capital gains tax could be imposed. If the decedent had sold the stock before his or her date of death, he or she would have realized a profit of $3,500,000 and the capital gains tax would have been imposed on the profit.
The question that comes into play with the repeal of the Federal estate tax is what happens to the step-up in basis. There are three possibilities:
- Congress does nothing and the step-up in basis at death remains in effect;
- The estate tax is replaced with a capital gains tax at death, similar to the tax method in place in Canada; or,
- The step-up in basis is repealed and heirs take assets at the same basis as the decedent had at the time of death (carryover basis).
If Congress Does Nothing
If Congress does not repeal the step-up in basis rules, this would be the best possible result. There would no longer be an estate tax at death and the heirs of a decedent would receive a step-up in basis in the decedent’s assets equal to their fair market value at the date of death. This would avoid any capital gains being imposed at death.
Capital Gains Taxes Imposed at Death
If Congress chooses to impose a capital gains tax at the death of a decedent, all of the decedent’s assets would be stepped-up to their fair market value. The difference between the basis and the fair market value would be considered a capital gain. The capital gain would then be taxed at capital gains rates. The question remains whether that capital gains rate would be the capital gains rate imposed upon the decedent’s estate, or imposed upon the recipients of the assets. Depending upon the income tax brackets of the recipients, this detail could result in significantly less taxes.
Elimination of Step-Up in Basis at Death
If Congress chooses to eliminate the step-up in basis of assets to fair market value at death, neither the estate tax nor a capital gains tax would be imposed at death. However, the decedent’s heirs would now inherit the decedent’s assets at their carryover basis. When the heirs sell the assets they will then realize the capital gain that the decedent would have realized had he or she sold the assets during their lifetime.
For example, if an heir inherits the $4,000,000 of Coca-Cola stock, which has a basis of $500,000, and later sells the stock for $4,500,000, the heir will realize a gain of $4,000,000 (the decedent’s gain of $3,500,000 plus the $500,000 of appreciation since the decedent’s date of death). Although there is not a capital gains tax imposed at the decedent’s death, this is only a deferral of the tax until the assets are actually sold.
Who is Impacted?
In both the repeal of the step-up to fair market value and the capital gains tax imposed at death scenarios, individuals with lower wealth may very well now be paying a tax they are not currently subject to. Under the current estate tax scheme, those couples worth under $22,400,000 are not subject to estate tax, but they enjoy the benefit of receiving a step-up in basis in their assets to fair market value at death. If either the loss of the step-up in basis or the capital gains tax occurs, these taxpayers will now be subject to a tax that could be as high as twenty percent (20%). Thus, all individuals could potentially now pay some sort of tax as a result of inheriting property. Congress in all likelihood would allow some form of an exemption from these taxes.
In the case of the loss of step-up to fair market value, Congress may allow individual decedent’s estates to allocate a certain dollar amount to step-up assets basis to fair market value. In 2010 when the estate tax was repealed, Congress allowed a $1,500,000 dollar step-up in basis for unmarried individuals and a $3,000,000 step-up in basis for married individuals. Even if the same dollar limits are allowed, the loss of carryover basis would impact many, many more people than the current estate tax impacts. Similarly, if a capital gains tax is imposed at death, this would affect all individuals who inherit property and an immediate tax would be payable. However, once again, it is likely that Congress would allocate some sort of exemption from the tax.
Although Congress has not repealed the estate tax, it has laid the ground work for repeal. When the topic of repeal once again arises, and it will, consider how the repeal will impact your bottom line.
If you have any questions or concerns, please feel free to contact me at firstname.lastname@example.org or by phone at 239-344-1162.
About the Author
Eric Gurgold serves as Chair of Henderson Franklin’s Estate Planning and Administration division and is Board Certified in Wills, Trusts & Estates by The Florida Bar. For over twenty-five years, Eric has concentrated his law practice in the areas of estate planning and administration, elder law, probate litigation, title insurance claims related to probate issues, business law and taxation. He assists clients in the preparation of wills, trusts, family limited partnerships, inventories, inheritance and estate tax returns, as well as providing counsel to minimize income and estate taxes.
Eric has been recognized by Florida Super Lawyers® magazine for his work in estate and probate law (2013-2017). He is also AV rated by Martindale Hubbell.
Eric is very active in the community and currently serves as a member of the Grant Advisory Committee and Scholarship Review Committee of the Southwest Florida Community Foundation, the Professional Advisors Network of the Harry Chapin Food Bank of Southwest Florida, the Planned Giving Committee for Habitat for Humanity Lee and Hendry Counties, and the Endowment Advisory Committee for the Charlotte County Community Foundation.