Will Congress Close the Trust Fund Loophole? #EstatePlanningAttorney

Kenneth BarneyEstate Planning Lawyer, Kenneth BarneyLeave a Comment

(Comments Regarding President Obama’s 2015 Tax Proposals)

On January 17, 2015, the White House released its fact sheet entitled, “A Simpler, Fairer Tax Code that Responsibly Invests in Middle Class Families.” This fact sheet was released as a precursor to President Obama’s 2015 State of the Union Address and his 2015 Tax Proposals.

The White House is calling for “closing the trust fund loophole,” which it identifies as the current tax laws as to receiving a step-up in basis on appreciated assets upon death. These proposed changes would not be restricted just to trusts funds, but would also apply to most appreciated assets and would be a fundamental change in American tax law, with far reaching effects.

The basis of President Obama’s proposal is to increase the top capital gains rate to 28% (it was 15% just a couple years ago and is currently 23.8%), yet more significantly treat death as a taxable event for capital gains purposes in addition to the estate tax.

This new tax policy would have a significant effect on many Americans, including those who would not currently have to pay an estate tax at death, as their gross taxable estate is under $5.43 million dollars.

For example, under current law, upon death all of a decedent’s assets get re-valued or “stepped-up” to the value of such asset at the time of death for capital gains purposes (although this rule does not apply to qualified tax deferred type assets such as 401Ks and IRA). Additionally, death in and of itself is not a taxable event, meaning that heirs who inherited a step-up in basis asset will only have to pay capital gains (based upon the new stepped-up value) when he or she decides to liquidate the asset.
Under President Obama’s 2015 tax plan, however, there will be no step-up in basis upon a decedent’s death and even worse, death will become a taxable event. This means that when a loved one passes away, two values will need to be established for each asset owned (such as real estate, investments, stocks, with a couple exemptions for small business owners). The two valuation dates would become; (1) the value as of the date of acquisition (original basis); and (2) the value as of the death of the decedent’s death. The amount between the original basis and the death value will becomes the taxable amount portion of any given asset.

Obtaining the valuation, as of the date of acquisition, will become an absolute nightmare for many families as some assets may have been in the family for many years or have passed down from generation to generation, without ever reflecting its original basis. Obtaining values that will withstand IRS scrutiny both at acquisition and date of death could also become a large expense at the time of a decedent’s death.

Additionally, under President Obama’s 2015 tax plan, all gifts made during a person’s lifetime will also be treated as a taxable event. Under current law, there is no basis increase when a gift is made as the recipient takes the grantor’s basis in the asset upon receipt. Although no basis increase is given, however, the gift is not deemed to be a taxable event, and gain will only be recognized and reported to the IRS upon the grantee liquidating the gifted asset and realizing the gain.

If you know or have read anything about Canadian death tax law, you will find President Obama’s plan is very similar to that tax system, with one exception. Under Canadian law, although all accrued gains and income are subject to tax at death, there is not a second estate tax on the decedent’s overall net worth. President Obama’s 2015 tax proposal did not address this issue and thus did not eliminate the estate tax, which means that upon death, some estates will be subject to a significant capital gain tax at death, in addition to paying a 40% estate tax on the decedent’s gross estate over a his or her applicable exclusion amount, which is currently $5.43 million dollars.

These proposals are extreme changes to the current tax code, and would drastically affect many families’ estate plans and their beneficiaries. Fortunately, most commentators on President Obama’s 2015 tax plan feel that his plan has little, if not zero, chance of passing in the current Republican controlled Congress. A drastic new tax seed has been planted however, one that a future Congress may try to reap at a later date.

If you have any questions regarding this article or family based estate planning, living trusts, last will and testaments, probate administration, guardianships, conservatorships or any other legal issues, please call the attorneys at Rowley Chapman & Barney, Ltd. (480) 833-1113.

Kenneth C. Barney is a partner and an Arizona Estate Planning Attorney, practicing in all the areas of the law shown above, since 1999.

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