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Obama Proposes Federal Estate Tax Overhaul


March 4, 2015
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Pres. Barack Obama proposed a major overhaul of federal estate tax policy during his State of the Union address.

These measures could have significant implications for a wide range of Americans, including the wealthy and those who inherit valuable items such as businesses.

Proposed change in basis

Existing policy uses the higher of the deceased’s original basis or the fair market value at the time of death to determine the tax basis of the inheritor. In almost all cases, the estate’s fair market value when the decedent passes away is the larger of the two. However, Obama is proposing levying a capital gains tax on how much the deceased’s assets have risen in value from the time the owner bought them, according to Bloomberg. Under this scheme, a stock portfolio that surged from a purchase price of $200,000 to $800,000 at the time of death would be subject to taxes even if it was not sold.

High tax burden

The proposal would also increase the top capital gains tax rate to 28 percent from its current level of 23.8 percent, the media outlet reported. As a result, the U.S. estate tax rate could be one of the highest of any industrialized economy, Stephen Moore, chief economist of the Heritage Foundation, wrote in a recent Investor’s Business Daily op-ed. He cited an estimate provided by Dick Patten, chairman of the American Business Defense Council, that the effective death tax rate would total 57 percent. After adding in state levies, the rate could reach as much as 68 percent. The average burden would be slightly less, coming in at 65 percent. Moore cites Ernst & Young figures indicating that only 1 in 38 industrialized nations monitored by the company – Belgium – has a higher death tax rate, which currently stands at 80 percent. However, Belgians inheriting wealth from an immediate family member would pay a rate of 60 percent.

Small business challenges

In the U.S., the situation is different, as an entrepreneur could increase the value of their business over time, pass it down to a member of their immediate family and end up generating both estate and income taxes, Robert Wood, a tax lawyer based in San Francisco, wrote in a Forbes article. This situation could create challenges for many, as small businesses already face difficulty when important members pass away, he emphasized. In these cases, simply staying in business can be a chore, and some companies will have to sell because of tax burdens. While many are worried about how fledgling firms would fare under the proposed policies, some have pointed to other concerns, according to Bloomberg. Katherine Dean, who works for Wells Fargo Private Bank in San Francisco as a managing director of wealth planning, noted how the change would affect stockholders. “We have a lot of families that own a specific stock, and they’ve owned that forever, and they do not want to get rid of it,” Dean told the news source. “This will have a huge impact on them. Huge.”

Simplifying the tax code

While many industry participants have criticized Obama’s proposal, he has promoted it as a way to make policy more equitable and straightforward, wrote Wood. Currently, assets are stepped up to market value for income tax purposes, as failing to do so could result in heirs paying both income and estate taxes on the same assets or estates. Obama also points to the federal government’s combined exemption for estate and gift taxes, which stands at $5.43 million, Wood noted. At any rate, many will likely tune in to this legislative proposal’s developments as it makes its way through the republican-led Congress.