There are two major estate tax reforms that could potentially be enacted in 2017. The first is a repeal of the Federal Estate Tax. The second is a repeal of the step-up in basis at death.
The Federal Estate Tax/Gift Tax is currently imposed on estates with a value of more than $5,490,000. In other words, you can give away, during your lifetime and/or at your death, $5,490,000 without paying estate or gift tax. This amount is also portable, meaning you can share this exemption with your spouse, allowing a married couple $10,980,000 in exemption between the two of them. This tax currently affects a very small percentage of estates.
Current tax laws allow assets that pass to a beneficiary through an estate to receive a step-up in basis. For example, if a person purchased company stock years ago, the stock would have a tax basis of what the person paid for it. Over the years the stock likely appreciated in value. If the stock is sold during the owner's lifetime, that person would have to pay capital gains tax on the appreciation in value. If the stock is passed to a beneficiary at the death of the owner, however, the beneficiary receives an automatic step-up in basis. This means that the basis in the asset is the value at the time of the death of the current owner. This allows the beneficiary to sell the asset without owing any capital gains. See below for an example. This law applies to most assets owned by a person at their death and therefore, affects all estates with assets.
STEP-UP IN BASIS ILLUSTRATION
Bob, an Iowa resident, purchases stock in ABC, Inc. for $100,000. Over many years ABC, Inc. continues to grow, until Bob's shares are worth $300,000. If Bob were to sell his stock when it is worth $300,000, Bob would owe capital gains tax.
If Bob instead died owning the ABC, Inc. stock, the shares would receive a step-up in basis to fair market value, resulting in significant tax savings when the shares are sold.
After the inauguration, the Presidency, House and Senate will all be controlled by Republicans. President-Elect Trump and the House Republicans have both indicated that they wish to repeal the Federal Estate Tax. President-Elect Trump has proposed replacing the Federal Estate Tax with an income tax on estates in excess of 10 million dollars. It is also proposed that the law that allows a step-up in basis be repealed.
These changes could present significant opportunities for estate planning, so long as proper planning is implemented. While no one is able to adequately predict what tax laws will be in the future, it is a good idea to meet with your estate planning attorney at Moore, Heffernan, Moeller, & Johnson, L.L.P. on an annual basis to ensure that your estate plan continues to implement your wishes, while minimizing taxes.0