Republicans Propose Estate Tax Repeal

Republicans answer President Obama's proposed tax increases for estates and gifts with a proposal to repeal the estate tax entirely and reduce the rate of tax applicable to gifts. The bill was estimated to reduce federal revenues by nearly $269 billion over 10 years.

Propose Tax Decreases

The House of Representatives passed a bill (House Bill) that would repeal the estate tax, largely on a partisan vote of 240-179. The Death Tax Repeal Act of 2015 (H.R. 1105) would repeal estate and generation-skipping transfer (GST) taxes for decedents who die and generation-skipping transfers made on or after the date of enactment. The House Bill includes a transition rule to alleviate the estate tax burden on those who die prior to the date of enactment. In the case of assets placed in a qualified domestic trust by a decedent who dies prior to the enactment date, the current estate tax would not apply to: (1) distributions from such trust before the death of a surviving spouse made more than 10 years after the enactment date, and (2) assets remaining in such trust upon the death of the surviving spouse.

The House Bill reduces the top gift tax rate to 35% and also provides that a transfer in trust will be deemed to be a taxable gift unless the trust is treated as wholly-owned by the donor or the donor's spouse. The lifetime exemption for gifts remains unchanged from present law ($5 million with a cost-of-living adjustment for calendar years beginning after 2011). The adjusted lifetime exemption amount in 2015 is $5.43 million.

The House Bill stands in stark contrast to the proposals President Obama made in his State of the Union address and Fiscal Year 2016 budget. The President’s proposal would eliminate the tax-free basis step-up by treating the transfer of appreciated assets upon death or a gift (except to charity) as a taxable event thus triggering capital gains tax on unrealized appreciation. The House Bill retains present law rules for determining the income tax basis of assets acquired by gift or from a decedent. The President’s proposal would also restore the estate tax rates and lifetime exemption amount to those that were in effect in 2009 and would severely curtail some popular tools for shifting asset appreciation to future generations.

Prospects for Tax Reform

President Obama was quick to dismiss the House Bill, and it is unlikely to be taken up in the Senate.  While it seems unlikely that any kind of meaningful changes to the estate and gift tax will tax place in the 114th Congress, the House Bill stakes out a Republican position on the estate tax in opposition to the President's proposals.

The Takeaway

Whether it is this year or after the next Presidential election, the time to prepare for changes in tax legislation is upon us. It is critical for the taxpayer community to be involved in the short-term and long-term debates on the federal budget and deficit reduction.