Proposals for tax reform include repeal of the estate tax, which introduces new questions for how assets will be transferred, either inter vivos or at death.
President Trump’s pre-inauguration proposal for tax reform and the Blueprint both explicitly sought to eliminate the estate tax. The Trump Administration stood by this policy proposal when it announced its plans for tax reform last week. However, the Trump Administration and congressional Republicans have remained silent on the gift tax. Some commentators interpret the silence to suggest that the gift tax will also be repealed, while others take this to mean that the gift tax will remain (as happened in 2010 when the estate tax rates were temporarily reduced to 0% as a result of President George W. Bush’s 2001 tax cuts).
Under current law, estates are generally subject to a Federal estate tax of 40 percent on amounts above a “unified credit” ($5.49 million as of 2017). The basis in the property received by an estate is generally “stepped up” to the fair market value of the property at the time of the decedent's death. Generally, gifts from one individual to another in excess of an annual $14,000 gift tax exclusion reduce the transferor’s unified credit. Any gifts made in excess of the unified credit are subject to the same rates as the estate tax rate.
Whether or not the gift tax remains would be a key factor for individuals to consider when structuring their estates plan. If the estate tax and the gift tax are both repealed, individuals will then be able to transfer their assets in a tax-free manner, either inter vivos or at death. If the estate tax is repealed and the gift tax remains, individuals would likely continue to hold onto their assets until death, at which point a decedent would transfer her estate to her heirs tax-free.
However, an open question remains regarding whether heirs would continue to receive assets with a basis step-up, even with the repeal of the estate tax. When the estate tax was phased out in 2010, the basis in assets transferred from a decedent was no longer stepped up; instead, a modified carryover basis regime took effect. Some commentators have suggested that congressional Democrats might push congressional Republicans to eliminate the step-up in basis realized at death if the estate tax is repealed, perhaps using 2010 as a model. How this issue is settled will have significant consequences for how assets are transferred in the coming years.