A bill seeking to repeal the estate tax recently passed the House of Representatives and is currently awaiting a vote in the Senate.
The legislation is unlikely to pass the Senate, and even less likely to survive a veto if it somehow does, but its progress is evidence of growing sentiment against the tax as currently constructed. Though a full repeal in the future is unlikely, barring some fairly extraordinary circumstances, a bipartisan bill introduced last week may offer insight into what a more realistic (a.k.a. palatable across partisan lines) solution to the estate tax issue may look like.
On Sept. 18th, Rep. Andy Harris (R-MD) proposed the American Solution for Simplifying the Estate Tax Act of 2015 (ASSET Act). The bill, co-sponsored by Reps. Alex Mooney (R-WV) and Don Beyer (D-VA), looks to streamline the estate planning process by introducing an option for those anticipating an estate tax bill on death to pay it off during life. The hope is to discourage wealthy Americans from taking assets out of circulation by stashing them in trusts and similar planning vehicles in anticipation of an estate tax bill at death and to lessen the burden on certain family businesses who may experience undue duress from the tax as currently applied.
In introducing the Act, Rep. Harris noted:
"Family businesses and the jobs they create will benefit from the discussion and analysis of the proposal. We hope that with the help of the Joint Committee on Taxation, we can develop a bill that does not increase the tax burden on Americans, but instead simplifies the process and preserves jobs."
Though it’s easy to think of the estate tax as only affecting the very wealthy, it also can have outsized impact on family businesses that hold high value, low liquidity assets. The most common example is the traditional family farm. The total assets of a family agricultural business can easily exceed the estate tax threshold, but most of the value is tied up in the land, livestock and equipment that the farm requires to function. There’s often very little liquidity, as excess funds tend to be continually reinvested into the farm itself. Estate planning for such a family can be extremely difficult, as the burden of paying a large, lump sum estate tax bill often requires a significant sale of fairly integral assets, setting the business back far beyond the dollar amount of the tax bill.
The ASSET Act attempts to create a revenue-neutral solution to the estate tax problem by relying on a combination of an annual surcharge and capital gains taxation on the sale of estate assets. The intent is to ensure that death is no longer a taxable event while still allowing the government to collect taxes roughly equivalent to the historical returns of the estate tax (about 1 percent of total tax receipts annually). Under the proposal, taxpayers who anticipate having a taxable estate on death will be able to voluntarily pay an annual surcharge of 1 percent of their modified Adjusted Gross Income. This surcharge must be paid for a minimum of seven years before it’s considered to preempt the regular estate tax.
The Act also lays out a series of new rules governing the cost-basis of assets transferred by decedents who elect the simplified treatment, treating such transfers as gifts and setting the basis at the lower of either the adjusted basis of the decedent or the fair market value of the asset. Finally, the Act proposes a two-year amnesty period allowing the removal of assets from certain trusts without incurring tax to allow taxpayers to adjust their plans to the new paradigm.
The solutions proposed by this bill are by no means perfect, and it’s unlikely to be the one that breaks the partisan deadlock on this issue, a fact of which even its sponsors seem aware, as evidenced by the quote above. However, by simply taking a swing at creating something that’s less steeped in absolutes than what we’ve, unfortunately, come to expect from Congress, there’s at least hope that the discussion generated by this Act and its ideas may eventually lead to a lasting answer that’s palatable to both sides.
The Act itself can be found here.