Death of the Death Tax?

On January 10, 2017, Rep. Kristi Noem (R-S.D.) introduced H.R. 631, the “Death Tax Repeal Act of 2017.” While this bill resembles a similar bill that failed to become law in 2015, with the 2016 elections, the political landscape in Washington has changed considerably. In brief, H.R. 631 provides that:

  • The estate tax will be repealed for descendants dying on or after the date of enactment.
  • The generation-skipping transfer (GST) tax is repealed for GST transfers occurring on or after the date of enactment.
  • The gift tax is retained with its current lifetime exemption of $5.49 million, but its tax rate is reduced to 35% (down from 40%). The gift tax exemption amount will continue to be adjusted annually for inflation.
  • The special “anti-freezing” tax rules, also known as Chapter 14, are retained, presumably to maintain the overall effectiveness of the current gift tax system.
  • The estate tax will continue to be imposed on principal distributions from pre-existing qualified domestic trusts (also known as “QDOTs”) with respect to non-citizen decedents dying before the date of enactment, but only for the 10-year period following the date of enactment.

Notably absent from this bill is any reference to a change in the current system in which the tax basis of an appreciated asset received from a decedent’s estate is “stepped-up” to the fair market value of such asset on the decedent’s date of death. This system effectively eliminates the capital gains on the pre-death appreciation of the value of such inherited assets. In earlier reports, many speculated that this rule would be changed either to a carryover basis system (where inherited assets would retain the same tax basis of the decedent), or even the “Canadian system” (whereby capital gains would be immediately recognized on the appreciated assets of a decedent, with such a tax payable shortly after death).

H.R. 631 is unlikely to pass simply as a stand-alone piece of legislation. Rather, as Congress begins to assemble a larger tax reform bill later in 2017, many tax experts feel that it’s likely that such legislation will include provisions that will repeal the current estate tax rules. Whether the tax basis rules will be changed, and whether a tax reform bill ultimately passes, will ultimately depend upon the political and fiscal realities that arise as the legislative process moves forward.

If the New England Patriots can win the Super Bowl from 25 points down, then anything can happen in 2017!

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