How Tax Reform Could Impact Various Families

President Trump and Republican lawmakers recently unveiled a Blueprint for tax reform. Here’s a link to a story about this in U.S. News. Here’s a link to a deeper look at the proposal in the Atlantic.

As I discussed in last week’s blog, there are many uncertainties in the plan and in the prospects for passage. But, this week I’ll examine three different families and the impact the repeal of the estate tax would have on them. I’ll assume in each instance that at the death of the first spouse, they leave everything to the survivor.

Our first family has $1 million of assets between them, consisting of a home and stocks. This family actually is far wealthier than most Americans, who end life with few assets, according to a MIT study.

• Under Current Law: There would be no estate tax on the death of either spouse. There would be a step-up in basis for the assets of the deceased spouse. Thus, the beneficiaries would receive the assets, other than IRD assets, with a fair market value basis.
• Blueprint: There would be no estate tax on the death of either spouse. Thus, there is no difference in estate taxation for families with $1 million. If the step-up in basis is modified, this could result in increased income taxes for the beneficiaries upon sale of the assets.

Our second family has $11 million of assets between them, consisting of a home, stocks, and life insurance.

• Under Current Law: There would be no estate tax on the death of either spouse, assuming the use of the marital deduction, portability and small administration expenses. There would be a step-up in basis for the assets of the deceased spouse. Thus, the beneficiaries would receive the assets, other than IRD assets, with a fair market value basis.
• Blueprint: There would be no estate tax on the death of either spouse. Thus, there is no difference from current law in estate taxation for families with $11 million. If the step-up in basis is modified, this could result in increased income taxes for the beneficiaries upon sale of the assets.

Thus, for families with under $11 million of assets, the Blueprint would not reduce estate taxes and may increase income taxes on the assets after death if the step-up in basis is modified.

Our third family is the First Family: Donald and Melania Trump. He has a net worth of $3.5 billion, according to Forbes magazine.

• Under Current Law: Assuming the use of the unlimited marital deduction and portability, there would be no tax at the death of the first spouse. At the death of the surviving spouse, there would be an estate tax. Let’s assume the assets receive a 35% valuation discount due to minority interests, etc. This would result in a taxable estate of $2.275 billion. After deducting the estate tax exclusions of both spouses, this would result in roughly $2.264 billion subject to tax. With a 40% estate tax, there would be an estate tax of over $905 million. There would be a step-up in basis for the assets, based on the estate tax value of the assets. Thus, the $3.5 billion of assets would have an income tax basis of $2.275 billion, assuming none of the assets were IRD assets. Let’s assume that the assets will be sold in the future and the present value of the future tax would be 10% of the amount by which they were discounted. (Of course, this is a complete shot in the dark due to uncertainty regarding whether the assets would be sold, the date of the sale and the tax bracket at that time.) That would result in a tax of about $122 million.
• Blueprint: There would be no estate tax on the death of either spouse. Thus, the Trumps would save over $905 million in estate taxes. If the step-up in basis is modified, this could result in increased income taxes for the beneficiaries upon sale of the assets. However, if the step-up in basis is not modified, the Trumps could have additional savings due to a higher step-up in basis because they would not have to plan for a valuation discount. Thus, they could structure their affairs to maximize the step-up, rather than minimize estate taxes. This could result in a basis of $3.5 billion for their assets, rather than $2.275 billion. This could result in no capital gains taxes on over $1 billion, the difference due to the discounting which would no longer need to be done to save estate taxes.

Thus, the Blueprint would not result in savings of estate tax for families with under $11 million. On the other hand, the Blueprint could save those with hundreds of millions or billions of dollars quite a bit. The Trump family could save over $1 billion in estate taxes and income taxes relating to the step-up in basis.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com