I usually refrain from commenting about proposals making changes to the tax code that, in my opinion, have no chance of passing in the current Congress. But I am making an exception in this case because within the majorly flawed proposal is a kernel of truth that is intriguing.
As background, you should be aware that every March when the President submits his budget to Congress, the “Green Book” contains tax proposals. Anyone who cares about this is aware that every year the President, not just Obama, but Presidents before him, include proposals that commentators like to rate from likely, to possible, to dead on arrival. Most proposals to change the tax code are DOA. President Obama’s favorites include eliminating zero out GRATs, reducing the applicable exclusion amount, and raising the estate tax rate. Without commenting on the efficacy of any single proposal, I call such proposals wishful thinking at best and campaign fund raising programs at the most cynical.
It is within this context that the most recent proposal must be evaluated.
It is woefully misnamed because it has nothing to do with trusts. In fact, it will promote even more trusts. The catch-phrase “trust fund loophole” is politic-speak for taxing rich trust funders. It certainly caught the attention of a lot of you.
The proposal, wrapped in so much doubletalk, is actually quite elegant, but so ill-conceived as to be meaningless in its present form.
The proposal treats death as a recognition event. Appreciated assets would be subject to capital gains taxation at the death of the owner.
Retirement accounts would not be affected. The proposal affects folks with appreciated assets other than retirement accounts.
This proposal is already the system used in Canada which has no estate tax. However, the President’s proposal did not propose eliminating the estate tax. Therein lays the tale.
Taxing appreciated assets and net worth is unfair. Taxing appreciated assets at death in place of an estate tax would affect each estate differently, better for some, worse for others, but undoubtedly it would raise a significant amount of revenue because the step-up basis rule is one of the biggest “loopholes” in the tax code. Despite the distaste for paying taxes, the plan would likely have a positive impact on the economy because it removes the incentive for holding onto appreciated assets solely waiting for the step-up basis at death. It would also benefit some older small business owners who would no longer be trapped in their businesses because of the promise of avoiding taxes if they die owning the business.
The reaction has been swift and it now appears that it was purely a political ploy unlikely to get any traction. Some commentators suggest it is an advance push against Republican efforts to repeal the estate tax.
Whatever it is, it certainly stirred the pot and increased awareness of the tax system.
Now would be an ideal time to check in with your tax and legal advisors and determine if your current plan is tax efficient and what you intend.