September 23, 2016

The Future of the Federal Estate Tax

Yesterday Democratic presidential candidate Hillary Clinton proposed two changes to the federal estate tax regime. Depending upon who you ask, the federal estate tax is also known as the inheritance tax or death tax.

First, she would increase the maximum tax rate to 65% (the current top rate is 45%).  This rate would be levied on the excess of estates that exceed a certain monetary threshold. In 2016 the amount is $5.45M. For instance, if an estate was worth $2M in 2016, no federal estate tax would be due, but an estate worth $20M in 2016 would incur federal estate tax liability.

Second, Ms. Clinton would eliminate the step-up basis rule that allows beneficiaries to receive inherited property with a new tax basis. For example, assume widow Lila purchases a home in San Jose, CA for $100,000 in 1990. She passes away intestate in 2016. Her sole heir is her only child, son Lucky. The value of the home is now $1M as determined by a probate referee. Lucky sells the home during probate for $1M in 2016. Since Lucky's basis is $1M, due to it being stepped-up, Lucky would not pay capital gains tax. Under Secretary Clinton's proposal, Lucky would not receive a stepped-up basis for the property. Previously President Obama suggested elimination of the same tax structure, which he phrased the "trust fund loophole." There has been no movement on this bill though.

Conversely Republican presidential candidate Donald Trump has proposed repealing the federal estate tax. That is, there would be no tax on a person's estate when they pass away, regardless of the size.    

Obviously each candidate views the federal estate tax markedly different.

What should be mentioned about either proposal is the necessity of an act of Congress for implementation. The Office of the President, the executive branch, can enforce laws but cannot pass laws. Whereas Congress, the legislative branch, can pass laws. So while Ms. Clinton or Mr. Trump can propose whatever law they want, ultimately both branches of Congress, the Senate and the House of Representatives, need to agree on a bill to amend the federal estate tax.


This blog offers no opinion on the strengths and/or weaknesses of either proposal. This post is strictly for informational purposes. Please do not contact me with your political viewpoints on the matter or which candidate you will be voting for in the upcoming presidential election. I am not affiliated with either campaign or any presidential campaign for that matter. Thank you.