Coping With the Death of the Death Tax


February 22, 2017


JRW WW PHOTOThe Situation

If the estate tax was a person, it would be lying in serious condition in a hospital, clinging to life. With President Trump having singled it out for elimination, and a Republican House and Senate behind him, its future is uncertain. On the other hand, this 100-year-old “death” tax—originally enacted to finance World War I—has survived attempts to kill it before. The issue is likely to be a close one.

Despite its age, the estate tax is not very popular. First of all, it’s double taxation, because the earnings which created the estate have already been taxed as income. And in cases where heirs are cash poor, the tax can force the arbitrary breaking up and selling off of family businesses, farms and ranches. In addition, the tax has led to convoluted avoidance strategies, creating a cat-and-mouse game between regulators and payers.

We should learn in the coming months whether it will survive. That means now is the time to think about how changes could affect you.

The Back Story

Though the estate tax rate is quite high at 40%, it currently only applies to estates over $5.49 million for individuals and $10.98 million for couples. So if it impacts you, don’t feel bad. It’s a signal you’re doing well financially.

And if it goes away, you’ll be doing even better financially, right?

Probably, but it’s not as simple as you may think.

What You Should Know

The estate tax does not exist in a vacuum. Nor does politics operate in one. As stated, President Trump’s plan would eliminate the estate tax but also remove the inheritance “step-up” on capital gains.

Suppose you bought Apple stock in 1983 at $1/share and have willed it to your children. For capital gains purposes, that stock’s starting value would “step-up” to its market value at the point when your children inherit it. If they then sold it, it would be taxed only on gains since they inherited it. All those gains from $1 up to when they inherited it would be untaxed.

If this step-up is taken away, heirs will have a built-in tax liability on the gains going back to when the stock was first bought. That means the benefit your heirs could realize from estate tax removal must be weighed against any untaxed capital gains in the estate that they may become liable for. Note that under Trump’s plan, the loss of step-up would only apply to capital gains above $10 million. But that and other details may change as events play out.

In the meantime, if you have any questions or concerns, let us know. We want to be your trusted, single-point-of contact on all financial matters, so you can rest easy and stay in control.
To learn more, please contact Jim Waters, CFP®, at 713.964.4028 or