The Senate's recent voteagainst a bill to repeal theestate tax would seem toindicate that the bid to endthe estate tax once and forall is nearly dead. At first glance youmight think that total repeal of the estatetax is a great thing for most wealthyAmericans—but is it? Repealing theestate tax might not be in the best interestof wealthy Americans or anyonewho, for that matter, has something topass on to their heirs.
Step-up in Basis
Back in 2001, President Bush set inmotion the legislation to progressivelyraise the exemption until it is completelyeliminated in 2010. However, in 2011the original 55% level and the $1-millionexemption will be back. The current rateis 46%, and the exemption is $2 millionfor an individual or $4 million for a marriedcouple. In 2004 there were just over30,000 estate tax returns filed in thiscountry out of 2.3 million people whodied that year. Only 3500 estates weregreater than $5 million, and they paidabout two thirds of the total estate taxes.
One of the things you get, even if youdon't owe an estate tax, is what isknown as a step-up in basis (ie, the basison which capital gains tax is paid). Forinstance, let's suppose an individual dieswith a house that has a current value of$2 million. Since this falls under the current$2-million estate tax exemption, thehome will be passed on to their heirs freeof any taxes, even if that house was purchased20 years ago at an original costof $150,000. However, if the estate taxwas permanently repealed, the heir tothe home would be subject to capitalgains tax on the $1.85-million difference.So, if there was no estate tax, andcapital gains of 15% applied, a capitalgains tax of $277,500 would still applyin the absence of an estate tax.
Never Say Die
On the other hand, with an estate taxin force, the heirs would receive a step upin basis to $2 million as if the homewas purchased that day at that price.The heirs would only be subject to paycapital gains tax on profits realized overand above that $2 million. Based onthese statistics, you can see that undercurrent law, in excess of 99% of the peoplein this country are not subject toestate taxes. However, everyone is subjectto capital gains tax.
In this sense, a total elimination ofthe estate tax could hurt Americanswho are not as wealthy more than thewealthy, who are able to afford andhave access to sophisticated tax planningand wealth management services.So, for the time being, the question ofestate taxes is in flux. If you are in yourlate 70s to mid-80s and you are planningyour estate, you have to considerdifferent scenarios. Whether or not theestate tax is repealed, if you have anestate of several million dollars or more,you will be subject to estate or capitalgains taxes, which still may be substantial.The need for tax planning is notgoing to go away anytime soon.
Thomas R. Kosky and his partner, Harris L.Kerker, are principals of the Asset Planning,Group, Inc, in Miami, Fla. The companyspecializes in investment, retirement, andestate planning. Mr. Kosky also teaches corporatefinance in the Saturday Executive and Health CareExecutive MBA Programs at the University of Miami in CoralGables, Fla. Mr. Kosky and Mr. Kerker welcome questions orcomments at 800-953-5508. For more information, visitwww.assetplanning.net.