Personal Finance

Once Again, the Estate Tax May Die

Brian J. O'Connor

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People who disapprove of the estate tax sometimes call it a death tax, but in 2010 it received a more colorful nickname: the "Throw Momma From the Train" tax.

Borrowed from the 1987 movie featuring Billy Crystal and Danny DeVito, that derisive label arose from an odd circumstance: The tax was suspended for 2010 but reinstated in 2011, allowing a reprieve for the estates of wealthy people who died that year.

There is no indication that anyone took a homicidal cue from the movie, but some estates benefited from the tax's hiatus. When Dan L. Duncan, a Texas pipeline tycoon, died of a brain hemorrhage in March 2010, for example, his $9 billion estate escaped the tax. If he had died three months earlier, the estate could have faced a tax bill of up to $4 billion.

The future of the estate tax is in debate again. President Trump promised to eliminate it during the campaign last year. "No family will have to pay the death tax," Mr. Trump said at the Detroit Economic Club in August. "It's just plain wrong and most people agree with that. We will repeal it."

Whatever happens, statistics show that very few families actually pay the tax — and those that do are subject to a series of interconnected other taxes.

"It's easy to say, 'Repeal the estate tax,' but it's like squeezing a balloon," said Alexander A. Bove Jr., an author and estates lawyer with Bove & Langa in Boston. "Something has to give when you do that."

Estates are now taxed at 40 percent. But with an exemption of the first $5.49 million per individual — and nearly $11 million per couple — the average effective rate can be much lower. Using Internal Revenue Service data from 2013, the Urban-Brookings Tax Policy Center calculated that the average size of estates paying the tax that year was $22.7 million, and that they paid an effective rate of 16.6 percent.

Few estates are large enough to require any payment. In 2015, only 11,917 estates filed I.R.S. Form 706, "United States Estate (and Generation-Skipping Transfer) Tax Return"; 4,918 of them owed any tax, paying a total of $17.1 billion.

"This tax paid by very, very wealthy people and the rate they pay is reasonable," said Chuck Marr, director of federal tax policy for the liberal-leaning Center on Budget and Policy Priorities. "A lot of this money has never been taxed before. Working-class people pay payroll taxes every week, and for wealthy people that's not how it works."

One big advantage the current estate tax gives to wealthy heirs is in the treatment of capital gains, which are taxed at a rate of 0 percent for anyone in the 10 and 15 percent income tax brackets, 15 percent for most others, and 20 percent for anyone in the top 39.6 percent bracket. But under current rules for estates, no capital gains are paid on assets up to the exempt level, and assets over that amount pass to heirs at the current market value, shielding them from tax on any gain in prices that may have already occurred. The I.R.S. found in 2015 that stock and real estate — assets likely to appreciate — made up more than half of all estates subject to tax.

Resetting the cost-basis, or value, of an inherited asset can be an important benefit. "The person who inherits it can sell it with no tax," Mr. Bove said. "That's a big advantage when you combine it with the exemption of almost $11 million for a couple."

The estate tax has two siblings, the gift tax and the generation-skipping tax.

The gift tax is imposed on any transfer of more than $14,000 in one year to any single individual. The total value of gifts given during someone's lifetime lowers their estate tax exemption.

The generation-skipping tax applies to gifts larger than the estate tax exemption that go to anyone 37 years and 6 months younger than the gift-giver. It's devised to keep wealthy families from avoiding one generation of estate tax by transferring the money directly to grandchildren.

"You're really talking about three taxes that work together as one unified piece of tax planning," Mr. Bove said. "You've got these three things working together and they're very complicated."

How any changes made by the Trump administration and Congress would balance those three taxes is unclear.

The Trump campaign's website sketched out a plan that would replace the estate tax with a tax on all capital gains held in an estate, with an exemption on the first $10 million of gains. There was no mention of the other two taxes.

On Capitol Hill, the 35-page "Built for Growth" plan released in June by Republicans on the House Ways and Means Committee calls for eliminating the estate tax and generation-skipping tax, but makes no mention of the gift tax.

In January, the conservative Americans for Tax Reform called for repealing the estate tax but did not mention the others. Where this will end up is not clear, but it is fraught with complications.

"I think people wouldn't be as happy by repealing the estate tax if the gift tax wasn't also repealed," said Ronald D. Aucutt, a partner and co-chairman of the private wealth services group of the McGuireWoods law firm in Tysons Corner, Va. "That would make the repeal bittersweet and leave some people wondering if these folks they voted for really did what they promised."

One longstanding criticism of the estate tax is that it can inflict harm on some family farms and businesses. If the value of farmland or assets held by a business grows over the years, estate tax may be due, even if the business lacks cash needed to pay the bill.

While remedying that problem would be good tax policy, Mr. Aucutt said, it is not a very big problem. "The impact of the estate tax on family farms and businesses, especially with an exemption of nearly $11 million a couple, has been overstated," he said.

Very few family operations ever face the tax, said Chloe Cho of the Center on Budget and Policy Priorities, citing estimates from the Tax Policy Center.

In 2017 only 50 small businesses and farms will pay any estate tax and they'll only be paying, on average, 6 percent of their value," she said. "They have enough to pay that without touching their businesses."

For those with estates large enough to merit the exercise, an estate plan can be completed in six months, including setting up trusts or transfers, experts say. The cost runs from $2,500 for a small, simple estate trying to stay below the exemption, to $10,000 or much more for the most aggressive plans, depending on how many individuals and entities are involved.

"Typically when people are this wealthy they're working with advisers and C.P.A.s and it's a whole strategy from their taxes to estate planning to gifting for the next generation," said Brian R. Jenney, a lawyer specializing in estates for the Kemp Klein law firm in Troy, Mich. "If you're just a little bit over the exemption, it's not overly complicated, but if you've got $30 million or $40 million, you're going to end up paying estate tax."

Because the estate tax generates a meager 0.005 percent of annual tax collections, according to I.R.S. figures, it generates far more political debate than federal revenue. And among many tax planners, the calls aren't so much for reform as for stability, or at least a period of benign neglect.

"Just leave it alone so we can plan," Mr. Jenney said. "But every administration seems to want to put their own twist on the estate tax."

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