Well, the election has come and gone. What does that mean in terms of estate planning and estate tax?
As a quick review, the current federal estate tax exemption is $5.45 million and is scheduled to increase to $5.49 million as of January 1, 2017. Each year it goes up a bit as it’s indexed by inflation. This means that there is only federal estate tax for any transfer of wealth above the exemption. I say it that way because it also includes any gifting that you’ve done (above the $14,000 exclusion) during the course of your lifetime.
President-elect Donald Trump wants to change all this. His plan calls for the repeal of the federal estate tax, or as he calls it, “the death tax.” But this is not a complete freebie.
Although he says he plans to repeal the estate tax, he also says he plans to repeal the step-up in basis upon death for capital gains.
Currently, when someone dies with an appreciated asset (whether it’s a house or stock), the basis, or what you paid for the asset, gets bumped up to its value at the time of your death. The capital gain is the difference between the asset’s original value and the value at the time of your death. So, if it gets bumped up, there is no capital gain and therefore no capital gain tax.
If you take away the step-up (or bump up), then there will still be an 18-20% capital gain tax. Mr. Trump is also planning to put in a $10 million exemption on the capital gain. This is to exempt small businesses and family farms.
But this will lead to other problems. The first is that the tax is collected when you sell the asset, not when the decedent dies. So there’s going to have to be a tracking system to know if/when you go over the $10 million. The second, and bigger problem, is trying to figure out what dad paid for the AT&T stock 45 years ago. Or, if he had a brokerage account with multiple stocks, you’ll need to try to get the basis for each one of those.
So, we are going from a $5.49 million exemption on all estate assets with a 40% tax to no estate tax and a $10 million exemption on only the appreciation of the assets with a 20% tax. But the bookkeeping is going to be a nightmare.
It’s also important to note that the New York estate tax isn’t going anywhere. Currently, it has a $4.1875 million exemption and will go up to $5.25 million in April 2017. And by 2019, the New York exemption is supposed to match the federal exemption. It’s unclear what they’re going to do at that time if there is no federal exemption. I don’t see New York repealing their estate tax.
Keep in mind that all this is just a plan. It will take a number of years to wind its way through Congress. What will happen remains to be seen.