House Republicans narrowly adopted a budget resolution on October 26, another step toward accomplishing tax reform by the end of the year. But with democratic congress members up in arms and division in the GOP ranks, it remains unclear whether a comprehensive reform bill will come to a vote at all, much less hit President Trump’s desk in December.
One of several sticking points in reform discussions has been the estate tax. President Trump has campaigned furiously against it, calling it “crushing, horrible, and unfair,” and the Unified Tax Reform Framework his administration released in September indicated a total repeal of both estate and generation-skipping taxes. But Republican senators, including Mike Rounds of South Dakota and Susan Collins of Maine, have expressed doubts about repeal. Rounds told Bloomberg news in October that the tax should be preserved, possibly with a higher threshold.
The estate tax affects 0.2% of Americans who die. The nonpartisan Tax Policy Center estimates that 11,310 people in 2017 will leave estates large enough to require filing a return, though only 5,460 of those estates will owe tax after applying deductions and credits. The annual revenue impact of the tax is around $18 billion – less than 1% of total revenue – but nonprofits worry that a repeal will devastate charitable giving. In 2010, when the estate tax was not in effect, contributions to nonprofits dropped by 37% from the previous year and then rose by 92% in 2011, when the tax was restored.
Should a repeal be signed into law, restoration of the tax will occur either automatically at the end of the reconciliation period (probably 10 years), or possibly earlier, if Democrats gain control of both Congress and the White House. Critically, there is no assurance that a restored estate tax will reflect the current high exemptions and historically low tax rates (the 40% estate tax rate is still the lowest maximum rate since 1932, excepting 2010 – 2012).
A repeal would also likely prompt a change in the stepped-up basis rule, as the rationale for the adjustment (avoiding double tax) would be gone. Instead, a carryover or modified carryover basis regime, as in Code §1022, could be implemented.
Tax planning in such an environment is difficult, if not impossible. We recommend taxpayers continue to file estate tax returns for portability, keep life insurance in place, and consider gifts that do not impact the transfer tax exemptions.
If you have questions or would like more information, please contact Donita Joseph at djoseph@windes.com or 844.4WINDES (844.494.6337).