President-elect Donald Trump made several promises during his campaign for President. As your estate planning attorney, we have focused on Trump’s promises related to estate tax reform. Based upon Trump’s tax plan, the following are Trump’s proposed changes to the federal estate tax regime during his presidency.
Current Estate Tax Regime
Currently, a married couple may transfer assets equal to $10,900,000 to anyone without any federal estate or gift tax. If you have more than $10,900,000 in assets, upon your death, your estate will incur a flat 40% tax on all assets above $10,900,000.
Separate from the estate tax, upon your death, any assets you owned will receive a step-up (or down) in basis equal to the fair market value as of date of death. Basis is essentially the price you paid for an asset. It will determine the amount of capital gain taxes (income taxes) you pay upon the sale of an asset.
Example of Step Up/Down in Basis: Let’s assume you bought $500,000 of Facebook stock in 2013. Your basis in that stock is $500,000. Let’s also assume that today your Facebook stock is worth $1,500,000 (the fair market value). If you sell all of your Facebook stock today, you will pay capital gains tax on $1,000,000 (FMV of $1,500,000 – Basis of $500,000 = Capital Gain of $1,000,000). However, if you die owning that same Facebook stock, the beneficiary of your Facebook stock will receive a new basis, equal to the fair market value as of your death. Therefore, if you died today, your beneficiary’s new basis would be $1,500,000. If your beneficiary turned around and sold the Facebook stock today, he or she would not pay any income tax (FMV of $1,500,000 – Stepped Up Basis of $1,500,000 = 0).
Estate Tax Reform Under Donald Trump’s Tax Plan
Trump’s tax plan proposes to repeal the estate tax completely. Therefore, under Trump’s tax plan, you may transfer an unlimited amount of assets upon your death without incurring any federal estate tax. However, Trump’s tax plan would not allow a step up in basis on assets above $10,000,000. Therefore, if you die with $15,000,000 in assets, you will pay no federal estate tax. However, $5,000,000 of your assets will not receive a step-up in basis and instead keep the same basis you had before death (carryover basis). This means that your beneficiaries would only incur capital gains tax upon the sale of those $5,000,000 in assets. Exactly how those $5,000,000 in assets will be separated from the $10,000,000 in assets that do receive a step-up in basis is unknown.
For those with assets over $10,000,000, this will be a “huuuuuuge” tax savings. Rather than paying 40% estate tax at death on assets over $10,900,000, they will only have to pay 20% capital gains taxes when they sell those assets. A lower tax rate, combined with deferring that tax until the asset is sold would be a tremendous tax savings for those with assets over $10,000,000.
Trump’s tax plan also states that “to prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.” This cryptic statement is impossible to decipher, but we will learn more once Trump takes office.
Further unknowns include what will happen to the gift tax. Will families be able to make unlimited gifts without tax? Will gifts continue to receive a carryover basis or will there be a step-up in basis on gifted assets as well? Will the Generation Skipping Transfer Tax also be repealed?
It should be noted that if you live in California, there is no additional estate or inheritance tax. However, other states, have much lower estate tax exemptions than the current federal exemption of $10,900,000.