There is much discussion these days about income tax reform. The tax code has historically been completely reformed about every thirty years and the last reform was about thirty years ago.
There has also been significant speculation as to whether the Federal Estate (a/k/a the Death Tax) is on the chopping block. Will repeal happen? When will repeal happen?
Given the dysfunction that is Washington these days, all anyone can do is speculate. So let me speculate…
Replace? The short version is that Donald Trump is president and has a Republican controlled congress. It’s no secret that Republicans have no love for the Estate Tax. For that reason repeal would seem a virtual certainty. Remarkably, during his campaign Trump put forth a plan to replace the current system with a capital gains tax at death. His campaign proposal was essentially a forced sale of all assets at death with a 20% tax on the difference between basis and fair market value. Similar to the current death tax regime, there would be an exemption so that the tax did not affect smaller estates. Please note that I said campaign proposals, I am not aware of any specific proposals since Trump’s election.
This death tax replacement may just be a position. It would seem bad politics for a politician who owns a multi-billion dollar family business to propose the repeal of the death tax.
Regardless, I have my qualms with the proposed death tax replacement. One problem is that a capital gains tax uses income tax basis in order to determine the amount of gains subject to taxation. Income tax basis can be very difficult to ascertain when the only person who had knowledge is now deceased.
The other problem is just that the system is completely new. Wouldn’t it be simpler to just lower the rate on the existing death tax system?
Repeal? Repeal is a distinct possibility, but depending on how the repeal is passed, it could be temporary. The question comes down to are there enough votes. It is worth noting that many experts (including some in my own firm) are of the strong opinion that the death tax is history. I remain skeptical.
How Many Votes – 51 or 60? Many legislative changes can be made that affect the government’s budget through a process known as “budget reconciliation”. These changes can be accomplished with a simple majority vote of the Senate and House. If budget reconciliation is utilized to repeal the death tax, the repeal is likely not permanent. Think Bush tax cuts. The Bush tax cuts were made through budget reconciliation. After 2011, taxes were set to return at 2001 levels. The reason for this is that laws passed through budget reconciliation cannot increase the federal deficit over ten (10) years.
To effect lasting change, bills must generally be passed by the Senate with 60 votes rather than a simple majority. This would require some Democrats to come to the table. There is some support among Democrats to do away with the tax, but it would not be very popular among the liberal base to do away with a tax that only affects “the 1%.”
With regard to the 60 vote requirement, there is also some speculation that this rule could be changed to allow all bills to be passed with a simple majority of the Senate. The process to change the 60 vote requirement is the same Senate rule change process that Democrats used to do away with the 60 vote rule to confirm lower court judges and the Republicans used to do away with the 60 vote rule to confirm now Supreme Court Justice Neil Gorsuch. In such event, a simple majority of the Senate could pass laws without the interruption of a filibuster.
The Gift Tax. Even assuming that the death tax is completely repealed, the gift tax is another matter. The gift tax serves to preserve the integrity of the income tax. Even Paul Ryan has not proposed the repeal of the gift tax.
Return of the Repealed Death Tax? If repealed, the death tax could come back. Should a Democratic administration claim control a few years from now with Democratic congress, the Death tax could come right back into play. If the Senate rules have been changed, the Democrats could change the laws right back by simple majority.
Conclusion. Given the uncertainty with respect to the death tax and the dysfunction that is Washington, it is important to plan based on the possibility that the death tax is in effect at death.