Jun 20

Written by: David Keligian
6/20/2017 12:35 PM  RssIcon

Although tax reform in general and estate tax repeal in particular have been sidetracked as a result of other issues facing the Trump administration, even if the estate tax is “repealed", it will not eliminate the possibility of taxes being due at death. That is because one of the long standing features of our estate tax law is the increase of a decedent's income tax basis in any assets that are included in their estate for estate tax purposes.

For example, under current law, if I own a piece of vacant land that cost me $1,000 and it has appreciated to $10,000,000 on my death, my estate would include an asset valued at $10,000,000 on which I would have to pay estate tax. However, for income tax purposes, my heirs could sell that property with a “stepped-up" income tax basis of $10,000,000, thus avoiding income taxes on the sale of the property at it’s date of death value.

For example, the estate tax previously was repealed for just one year in 2010. Anyone who died that year didn't pay estate taxes, but they also lost most of the benefits of an income tax basis step up on their death. No one believes that the estate tax would be repealed without also doing away with the income tax basis step up.

Candidate Trump made the comment that the estate tax should be repealed, but coupled that with the comment that there should be a “$10,000,000 exemption” to protect farms and small businesses. The $10,000,000 “exemption" makes no sense unless Trump had in mind a plan that would subject appreciation to income tax on death. Canada follows such a system.

Of course there are unanswered questions, such as whether the income tax would be due on the date the first of a married couple dies, or deferred until the second death (as the estate tax can be under current law). However, my guess is that for wealthy families, there will still be a “death tax", regardless of whether it’s in the form of an estate tax or an income tax.

Which brings us to an important point – – in a high tax state like California, the combined federal and state income tax on appreciated assets can cost an amount that approaches what would be paid in estate tax. (The State of California has also indicated that, if the federal estate tax is repealed, California intends to replace it with a California inheritance tax, with tax rates equal to the current federal estate tax rates).

There are of course many reasons besides taxes to plan your estate, including avoiding probate and asset protection. But regardless of what label the politicians put on it, there is still the need for tax planning.

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Copyright ©2017 David Keligian