Implications of New Leadership in the White House
Regardless of the outcome of this election, we can be certain that the future of estate taxes is uncertain.
Both major party candidates for president have set out proposals for changes in US fiscal policy. Fiscal policy is not set solely by the president, but if the president has cooperation from Congress, he or she can have a major impact.
Current federal estate tax law exempts estates worth $5.45 million or less ($10.9 million for a married couple). Estates worth less than $5.45 million will not pay any estate tax at all. According to a 2015 report from Congress’s Joint Committee on Taxation, 4,700 estate tax returns reporting tax liability were filed in 2013, out of 2.6 million total deaths in the United States. That means the estate tax hits roughly 0.2% of Americans, or 1 out of every 500 people who die. For these estates, after the $5.45 million exemption is applied, estates pay a 40% tax upon the death of a taxpayer. Because of the large exemption before the tax is applied, the average effective tax rate on the estates that do pay a tax is approximately 16.6%.
Clinton has proposed to reduce that exemption to $3.5 million and to increase the estate tax rate. Clinton claims that the lower exemption will affect only 4 out of 1000 estates, double the number of currently affected estates, but still less than 1%.
Clinton’s new proposed estate tax plan includes raising the estate tax as high as 65%, the highest in the history of estate tax, which was originally introduced in 1916. She proposes a 50% rate for estates worth over $10 million per person, 55% for estates over $50 million, and 65% for estates exceeding $500 million.
Trump has a plan to repeal the federal estate tax entirely. In order to make up for the lost revenue, he proposes to impose a capital gains on any unrealized gains held at death, but the first $10 million would be exempt from this capital gains tax. Trump has also proposed a plan to disallow capital gains tax exemption for contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives.
Trump has not yet set out the details for his plan, which is novel. For example, it is unclear whether the $10 million exemption applies per person or per married couple. Also, it is unclear whether the capital gains would be due upon the death of the person holding the assets or only when the assets are eventually sold by the estate beneficiary.
Experts are unsure whether the Trump plan would result in less tax for high-value estates than the current system; however, assuming the $10 million exemption is per married couple, the new capital gains death tax would affect roughly the same group of people as current estate tax.
If you believe your estate is at or near one of these tax thresh holds, you should consult with an expert in estate tax to determine how your estate might be affected by these vastly different tax proposals.