The Case Against Estate Tax Repeal

The Trump administration is proposing a complete repeal of the Federal estate tax.  The federal government currently levies a tax on all assets owned at time of death.  Using federal tax credits, the first $5.49 million in assets are exempt from federal estate tax.  In return for being subject to the federal estate tax, all assets owned at death get a stepped-up federal tax basis.  This is where it gets interesting.

Tax basis is the number used to figure the gain or loss when you sell an asset.  For example, a share of stock bought for $1 and then sold for $101 has a tax basis of $1 and gain upon sale of $100 ($101 – $1 = $100).  Under the current federal estate tax system, if that asset is sold at death or after, the new tax basis is the market value on date of death.  In the above example, there would be no taxable gain.

If the federal estate tax is completely repealed, the step up in tax basis will probably be repealed, too.  So long as the person who inherited the appreciated asset does not sell the inherited asset, no additional federal tax would be incurred.  However, when they sell the asset, they use the deceased person’s original tax basis.

Most people do not have more than $5.49 million in net assets.  Those people will probably incur capital gain tax when they sell the inherited asset.  This may be one instance where the current administration’s proposed tax reform decreases taxes on wealthy families who have the luxury of not selling assets upon the owner’s death.  It is very possible that the net result is increased federal tax revenue from all those people with less than $5.49 million in net assets.