Death to Death Taxes: The Future of the Estate Tax Under the Proposed Tax Plan

“Death will no longer be a taxable event in America,” said U.S. Vice President Mike Pence during a speech to a Michigan crowd in late September 2017.  Among the many proposed tax revisions, the House (“Tax Cuts and Jobs Act” or “H.R.1”) and the Senate’s proposed bills have increased the credit against the estate, gift, and generation-skipping transfer tax. The House eventually repeals the estate and generation-skipping transfer tax; however, the Senate allows the estate tax and gift tax to remain intact.

Under current law,

• Property in an estate is generally subject to a top tax rate of 40% before it passes to the estate’s beneficiaries.
• Additionally, property that is transferred beyond one generation, whether by bequest or by gift, is subject to an additional generation-skipping transfer tax, also with a top tax rate of 40 percent.
• The first $5 million worth of transferred property is exempt from the estate, gift, and generation-skipping taxes, in any combination thereof. This amount is known as the basic exclusion amount and is indexed for inflation ($5.49 million for 2017).
• Transfers between spouses are excluded from these taxes, and when an individual dies without his or her assets exhausting the basic exclusion amount, any unused basic exclusion amount passes to his or her surviving spouse, with a top basic exclusion amount of $10.98 million for 2017.
• When a beneficiary receives property from an estate, the beneficiary generally takes a basis in that property equal to its fair-market value at the time the decedent dies, which is known as taking a step-up in basis. However, when a donee receives a gift from a living donor, that donee generally takes the donor’s basis in that property, which is known as taking a carryover basis.

As proposed in H.R.1 and the Senate Bill,

• The basic exclusion amount is doubled from $5 million (as of 2011) to $10 million, which is indexed for inflation. This provision would apply to tax years beginning after 2017.
• Furthermore, beginning after 2023, the estate and generation-skipping taxes are repealed while maintaining a beneficiary’s stepped-up basis in estate property.
• The gift tax is lowered to a top rate of 35 percent and retains a basic exclusion amount of $10 million and an annual exclusion of $14,000 (as of 2017 and $15,000 as of 2018), also indexed for inflation.

The Joint Committee on Tax estimates the provisions pertaining to those taxes just referenced would reduce revenues by $172.2 billion over 2018-2027. According to the Tax Policy Center, in 2013, about 11,300 estate tax returns were filed for people who died in 2013, of which only 4,700 were taxable (meaning they exceeded the exclusions amounts). This means less than 1 in 550 of the 2.6 million people that died in 2013 were subject to the estate tax. The Tax Policy Center estimates an increase of only 600 additional estate tax returns being filed in 2017.

Despite the estate tax only applying to a very small percentage of American families, it is important to stay apprised of the proposed regulations and their effects on the overall tax plan.