The Estate Tax: Does Repeal Have Real Appeal?

The Estate Tax: Does Repeal Have Real Appeal?

Despite the star-power of its leading men Kirk Douglas and Johnny Cash, the 1971 movie A Gunfight didn’t get much attention.   The low-budget domestic spaghetti western tells the story of two broke and over-the-hill gunslingers who agree to hold and sell tickets to a showdown – “Winner take all, widow takes the body.”

But anyway, back to all this talk about estate tax repeal.  The President-elect made clear throughout his campaign that it his intention to attempt elimination of federal transfer taxes.  For a discussion considering the likelihood that the tax may not be repealed see our recent article by clicking here.

Many heavyweights in the planning industry consider repeal a done deal.  But all agree that what might be left and/or what might take its place will create tax problems for which life insurance will still provide a ready and cost-efficient solution.  Consider:

  1. Planned obsolescence – If the Administration can’t muster 60 votes in the Senate for a filibuster-proof tax proposal, it may have to make changes through the budget reconciliation process which requires only a simple majority.  But it also requires compliance with the Byrd Amendment which imposes a maximum 10-year “sunset provision” (as in the 2001 tax law under President Bush) if a bill is deemed to reduce revenue.
  2. An alternative tax – The estate tax may be replaced by a capital gains tax (similar to that imposed in Canada) that would levy against the gain above the decedent’s basis on any asset passed at the time of death.
  3. Carryover basis – Rather than a stepped-up basis, heirs would inherit both the asset and the decedent’s basis in the asset on bequests.  This could result in a significant capital gains tax to the heir when sold.  There may even be imposed a deadline by which time the heir will be taxed whether or not the asset the asset is sold.
  4. Retention of some form of gift tax: keeping the barn door closed – This would discourage a) the wholesale transfer of assets to income-shift or minimize capital gains tax, and b) keep assets in the estate where they would be subject to an estate tax should one ever be reinstated.
  5. The states: there is still life in their death tax laws – Over half of the jurisdictions have an estate or inheritance tax, or both.  Those will not disappear with repeal of the federal estate tax.  In fact, repeal may initiate more states to pass laws and create their own funereal gravy train.

Spoiler Alert!  A Gunfight ends with a victorious Johnny Cash riding out of town leaving behind Douglas’s inconsolable widow watching as he goes.  The storyline then cuts to an alternative ending in the form of a fantasy sequence in which Douglas is the winner of the duel.  That vignette ends with him riding out of town leaving behind an inconsolable and watching wife who he has assured he will call for once he has established a better situation.  Yeh, sure.

Sometimes the more things change, the more they remain the same.  Insurance advisors in the large-case estate planning marketplace concerned about a loss of business should take heart in the film’s message that different scenarios don’t necessarily result in dramatically different results.  Call to talk about tax law changes and how they might affect the need for life insurance in your current or future casework.