Estate Tax on the Chopping Block?

Posted:  Thursday, November 9, 2017 - 9:45am
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About this blog:

  • Sarah Ruef-Lindquist, JD, CTFA

    Sarah believes sound, thoughtful planning is a gift we give ourselves, our families and our community.

    She is a lawyer and seasoned non-profit executive who has worked with dozens of organizations, individuals and families as a philanthropic advisor and senior trust officer. She holds the Certified Trust and Financial Advisor certification and FINRA Series 7 and 66 registrations through Commonwealth Financial Network. Sarah and her husband live in Camden. The Financial Advisors of Allen and Insurance Financial are Registered Representatives and Investment Adviser Representatives with/and offer securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Allen Insurance and Financial, 31 Chestnut Street, Camden, ME 04843. 207-236-8376.

For many years now, there has been a tax on wealth you gave away, whether during lifetime, or at death, with some exemptions and thresholds…but the House of Representative HR 1 Tax Cuts and Jobs Act proposed in early November wants to change all of that. 

Currently, you can gift or leave at the time of death $5.49M without tax; the proposed legislation would double that amount, and phase it out entirely after 2023, for gifts made through estates. The lifetime limit on gifts free of tax would remain the same.

That doesn’t impact about 99% of the US population. In Maine, estates in excess of $5.49M are by far the exception to the rule. However it would impact much of the population if the so called “step-up in basis” were repealed along with the estate tax.  Essentially, the consolation prize for having an estate tax of up to 40% was that heirs were able to use the date of death value for their basis when selling inherited stock. This is almost always preferable to using the decedent’s cost basis which is often much lower, resulting in a larger capital gains tax when the stock is ultimately sold.

The good news is that the “step-up-in-basis” provision is not slated for repeal in HR 1. What the final language will ultimately be for tax reform is unknown, but for those of us who deal with the issue of planning, it’s nice to think that this part of a familiar planning strategy might not be on the legislative chopping block.

For many years, people in the process of planning for their estates, and whether to give children certain assets during life or at death has involved consideration of whether you wanted to give the gift of low basis (also known as “carryover basis” which I affectionately call “the gift that keeps on taking” because of the impact on capital gains) or leave an asset at death to allow for stepped-up basis to accompany those assets. Many planning decisions have been made over the years with that structure in mind. If it changes, there could be some folks going back to the drawing board on their estate plans.