Donald Trump’s election will likely result in a proposal to eliminate estate tax as part of an overall tax reform package. However, the passage of such a bill and the compromises needed to make such a change will likely evolve over time – although the president-elect has already suggested (as one possibility) a capital gains tax for heirs of larger estates.
It should be noted that most U.S. citizen’s estates do not pay federal estate tax – only around 5,000 paid such tax in year 2015 although it did result in $7.4 billion of tax revenue - mostly by the larger estates. Texas has no state or inheritance tax – which is contrary to many states. If the estate tax stays in place, it is projected that $269 billion would be collected over the next 10 years. So, as far as estate taxes (of course, there are many other reasons for estate planning other than simply eliminating or reducing taxes), a Texan who is single would not be subject to estate tax (unless they have made excessive gifts during their lifetime) if their estate is under $5,450,000.00 if the person died in year 2016 and that limit is rising to $5,490,000.00 as of January 1, 2017. Furthermore, if married, the surviving spouse can use the decedent’s unused exemption thus resulting in a couple being able to transfer $10.98 million without estate or gift taxation as of January 1, 2017. For estates over that limit, the federal estate tax rate is 40%.
To reduce the loss of tax revenue and to increase chances of passage, Trump’s compromise (according to his campaign website) is as follows: “The Trump Plan will repeal the death tax, but capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.” Wealthy citizens would certainly prefer this since the top capital gains tax rate is 20% whereas the present estate tax rate is 40%. It should be noted that many prefer to either hold highly appreciated assets (since there is no tax on the appreciation if held until death) or to give to charity due to the tax benefits of giving to a charity. Both Trump and Clinton have their own charitable foundations. To prevent abuse of tax avoidance, the Trump Plan would prevent contributions of appreciated assets into similar private charities established by the decedent. This might result in less charitable giving. Also, many states that have state estate or inheritance taxes that are based on a federal estate tax return. So, the impact on those states would have to be resolved as well.
Although the estate tax affects very few, this is a hot button issue for many Americans who find it deplorable to be taxed through life and to then be taxed upon death as well.