Written by Broadridge Investor Communication Solutions, Inc. and Provided by Ken Fortuna, Financial Advisor with Waddell & Reed.
While no one can predict the future, the possibility of tax reform is once again in the spotlight.
If it occurs, it may very well include repeal of the federal estate tax and related changes to the federal gift tax, the federal generation-skipping transfer (GST) tax, and the federal income tax basis rules.
History of the federal estate tax
In general, an estate tax is a tax on property a person owns at death. In one form or another, a federal estate tax has been enacted or repealed a number of times since 1797.1
|Estate tax enacted||Estate tax repealed|
*For 2010, the estate tax was repealed, but later retroactive legislation provided that an estate could elect to be subject to estate tax in return for a stepped-up (or stepped-down) income tax basis for most property. The estate tax was extended in 2011, with some changes.
The estate tax has undergone many changes over the years, including the addition of a federal gift tax and a federal GST tax during modern times. A gift tax is a tax on gifts a person makes while alive.
A GST tax is a tax on transfers to persons who are two or more generations younger than the transferor. In recent years, property owned at death has generally received an income tax basis stepped up (or down) to fair market value at death.
During the 2000s, the estate, gift, and GST tax rates were substantially reduced, and the gift and estate tax lifetime exclusion and the GST tax exemption were substantially increased.
The estate tax and the GST tax, but not the gift tax, were scheduled for repeal in 2010 (although certain sunset provisions would bring them back unless Congress acted), but legislation extended the estate tax and the GST tax in 2011. (For 2010, the estate tax ended up being optional and the GST tax rate was 0%.)
The gift and estate tax lifetime exclusion and the GST tax exemption were increased to $5,000,000 and indexed for inflation in later years. For 2013, the top estate, gift, and GST tax rate was increased to 40%, and the extension and modifications were made “permanent.”
|2017 Estate Planning Key Numbers|
|Annual gift tax exclusion||$14,000|
|Gift tax and estate tax basic exclusion amount||$5,490,000|
|Noncitizen spouse annual gift tax exclusion||$149,000|
|Generation-skipping transfer (GST) tax exemption||$5,490,000|
|Top gift, estate, and GST tax rate||40%|
Federal estate tax
Repeal of the estate tax seems possible once again. If repeal occurs, it could be immediate or gradual as during the 2000s. Would it be subject to a sunset provision, so that the estate tax would return at a later time?
All of this may depend on congressional rules on the legislative process, other legislative priorities, and the effect the legislation would have on the budget and the national debt.
Federal gift tax
If the estate tax is repealed, the gift tax may also be repealed. However, it is possible that the gift tax would be retained as a backstop to the income tax (as in 2010).
To some extent, the gift tax reduces the ability of individuals to transfer property back and forth in order to reduce or avoid income taxes.
Federal GST tax
If the estate tax is repealed, the GST tax would probably be repealed (as in 2010). If the gift tax is not repealed, it is possible that the lifetime GST tax provisions would be retained, but the GST tax provisions at death repealed.
Federal income tax basis
If the estate tax is repealed, it is possible that the general income tax basis step-up (or step-down) to fair market value at death would be changed to a carryover basis (i.e., the decedent’s basis before death carries over to the person who inherits the property).
In 2010, a modified carryover basis (a limited amount of property could receive a stepped-up basis) applied unless the estate elected to be subject to estate tax. It is also possible that a Canadian-style capital gain tax at death could be adopted in return for a stepped-up basis for the property.
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. The article was written by an independent third party, Broadridge Investor Communication Solutions, Inc. and is provided for informational and educational purposes only. Copyright 2017 – Broadridge Investor Communication Solutions, Inc.
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Ken Fortuna, M.B.A.
Financial Advisor at Waddell & Reed, Inc.
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