October 4, 2016
Many Americans vote based on how a candidate’s position affects their wallets. Election 2016 has a wide range of proposals that may drastically impact the estate taxes of many citizens. This blog provides a brief overview.
Currently there is a Federal estate tax of 40% imposed on estates in excess of $5,450,000 ($10,900,000 for couples). At death a decedent’s property receives a stepped-up (or stepped-down) tax basis equal to fair market value at the date of death. This means that there is no capital gains tax on estate property sold shortly after death since the selling price is most likely equal to the fair market value as of the date of death.
The presidential candidates have released details of their tax position. Let’s look at how they would change the estate tax.
Hillary Clinton’s original proposal increases the estate tax rate to 45% and decreases the threshold for taxation to $3,500,000 per person. A single person with an estate of $5,450,000 which currently is nontaxable would incur an estate tax of $877,500 under that Clinton proposal.
More recently Clinton has revised her tax plan to impose higher taxes for the super—rich. For taxable estates over $10 million the rate of tax would be 50%. Estates over $50 million would incur taxes at a 55% rate. A third bracket rate of 65% would apply to estates exceeding $500 million. These higher rates were initially proposed by Senator Bernie Sanders during the Democratic primary.
Clinton’s new proposal, announced September 22nd, also changes the income taxation of property following the property owner’s death. The proposal would repeal the step-up in basis rules which eliminated capital gain on the sale of inherited property. Under the new proposal the transfer of property at death or by gift during life would trigger the taxation of the appreciation in value prior to death or gift. Note that Clinton’s tax proposal changes the current capital gains tax. She proposes a capital gains rate of 43.4% if the asset was held for 2 years or less. For assets held 2 years to 6 years the rate is lowered incrementally. While there likely will be a generous exemption against the amount subject to tax the Clinton plan is certain to lead to significant increases in death taxes.
Donald Trump proposes to eliminate the estate tax. However, he would also change the tax basis rules. Estates of $10 million or less would still enjoy the stepped-up tax basis thus avoiding the capital gains tax on appreciation prior to death. For estates greater than $10 million capital gains would be subject to tax at the current rates which are generally 15% or 20%.
Neither Clinton nor Trump address the generation-skipping tax of 40% which is imposed when a gift or bequest is made to a grandchild. The House Republican Tax Reform Plan of 2016 calls for the elimination of both the estate tax and generation-skipping tax.
Gary Johnson, the Libertarian presidential nominee and former Republican New Mexico Governor supports a flat-rate consumption tax on purchases. This tax would replace all federal taxes including the estate tax. It is estimated that this consumption tax (referred to as the “Fair Tax”) of 23% roughly equates to the lowest current income tax rate of 15% plus payroll taxes.