With Election Day 2016 fast approaching, the candidates – Hillary Clinton (D), Donald Trump (R), and Gary Johnson (L) – are continuing their respective pushes to win votes at the polls. While certain issues, such as immigration reform and healthcare spending, have taken center stage, there are of course a number of other important issues that haven’t made their way into the national headlines.
One of these issues is that of federal estate and gift taxes. Should they be raised? Lowered? Eliminated altogether? Or, are they ok where they are? Estate and gift taxes can cost families dearly when their loved ones pass away, and knowing what your vote means for your family’s financial future will be critical to making an informed decision on November 8.
What Is Each Presidential Candidate’s Stance on Estate and Gift Taxes?
So, with this in mind, what does each of the presidential candidates have to say about estate and gift taxes?
Hillary Clinton (Democrat)
Democratic presidential candidate Hillary Clinton’s tax plan includes proposals to increase federal revenue from estate and gift taxes. Specifically, Clinton wants to reduce the threshold for estate tax liability from its current levels of $5.4 million to $3.5 million for individuals and $10.9 million to $7 million for married couples. Her plan would also increase the maximum estate tax rate to 65 percent. In addition, Clinton has proposed a lifetime gift tax exemption cap of $1 million.
According to The Fiscal Times, these changes would account for roughly one quarter of the total additional revenue generated under Clinton’s overall tax policy. National Public Radio (NPR) reports that, even at the reduced $3.5 million threshold, only about four out of every 1,000 families would be subject to estate tax.
However, keep in mind life insurance proceeds are a part of taxable estate and many people with a modest size of an estate could be potentially subject to an estate tax because of their insurances.
In Clinton’s plan, What would have the biggest impact for most people is a repeal of step-up in basis at death. Under a current system, an appreciated property gets a new basis to a market value at the owner’s death and heirs only have to pay capital gains tax for the difference between the sale price and the value when they inherited the property.
If Clinton proceeds with her plan to repeal the step-up in basis, it means that heirs have to pay capital gains tax on the increase during the lifetime of the deceased. It means that many people who have owned properties for a long time and their heirs now have to pay a significant amount of capital gains tax.
Donald Trump (Republican)
Republican presidential candidate Donald Trump has repeatedly called for the estate tax and the gift tax to be eliminated altogether. Trump refers to these taxes as double taxation (due to the fact that the estate and gift taxes can apply to assets acquired with taxed income), and argues that they can create extreme hardships for the families of farmers and other small business owners who may not have the liquid assets needed in order to pay these taxes when they come due.
Gary Johnson (Libertarian)
Libertarian presidential candidate Gary Johnson supports abolishing the federal estate and gift taxes as well. Johnson’s plan would eliminate these taxes as part of a transition to a single federal consumption tax, which is also referred to as the Fair Tax. The Fair Tax plan eliminates all personal and corporate taxes (and even eliminates the IRS) in favor of establishing a single 23 percent tax on goods and services purchased for personal consumption. The plan would include a “prebate” that would exempt purchases up to the poverty level.
In summary:
- Hillary Clinton (D): Reduce the threshold for estate tax liability, increase the maximum estate tax rate, and impose a lifetime cap on gift tax exclusions.
- Donald Trump (R): Eliminate the estate tax and the gift tax entirely.
- Gary Johnson (L): Eliminate the estate and gift taxes as part of an overall transition to the Fair Tax, which would apply a flat 23 percent tax to personal purchases of goods and services.
Why the President’s Estate and Gift Tax Policy Matters to You
When preparing your estate plan, estate and gift taxes can weigh heavily into not only how you decide to distribute your wealth, but when you decide to distribute it as well. If the total value of your assets exceeds $5.4 million (under the current tax laws), the value of your estate above this threshold can be taxed at a rate as high as 40 percent. You can reduce the value of your estate in order to avoid this tax by giving gifts during your lifetime; however, if you give away too much, then your gift-giving becomes a taxable event as well. According to the Center on Budget and Policy Priorities, the average effective estate tax rate for those who owe is 16.6 percent – still a sizable portion when you are talking about hundreds of thousands or millions of dollars that would otherwise pass to your family.
What is the Estate Tax?
The estate tax is a federal tax that applies upon the transfer of an individual’s property at death. The estate tax applies to the then-current fair market value of your property, including bank accounts, investments, real estate, trusts, business interests, insurance, and other assets. Mortgages, estate administration expenses, and certain other debts can be deducted before arriving at the value of your “taxable estate.”
Once you arrive at your taxable estate, you factor in any applicable deductions and any taxable gifts given during your lifetime, and then you apply the appropriate tax rate to arrive at your estate tax liability.
What is the Gift Tax?
The gift tax is a federal tax that applies to donations made during a person’s lifetime. As noted on the IRS’s website, while “[t]he general rule is that any gift is a taxable gift . . . there are many exceptions to this rule.” For example, the following gifts are not subject to the gift tax:
- Gifts to your spouse
- Gifts that do not exceed $14,000 in any calendar year (the annual exclusion)
- Gifts to political organizations
- Payment of someone else’s tuition or medical expenses
Non-exempt gifts are subject to tax at a rate of up to 40 percent.
Importantly, as we referenced above, making use of the gift tax exemption will factor into your estate tax liability. This is because lifetime gifts reduce your available estate tax exemption. For example, if you give away $1 million in gifts during your lifetime, your estate tax exemption will be reduced from $5.4 million to $4.4 million. This is designed to ensure that wealthy individuals do not avoid transfer taxes entirely by gifting their estates prior to death.
As you can see, planning to avoid these taxes can take on critical importance during the estate planning process. Hillary Clinton’s tax plan would make estate and gift tax planning more important to more individuals, while Donald Trump’s and Gary Johnson’s proposals would do away with the need to factor these taxes into your estate plan entirely. Is this a big enough issue to affect your vote in November?
Election Day 2016: Weigh the Issues Before You Cast Your Ballot
Of course, estate and gift taxes are far from the only issues at stake in the 2016 presidential election; and, with two months to go, it is still possible for the candidates to offer alternate proposals. Before you vote, you should be sure to educate yourself on all of the issues that will affect your ballot on November 8, 2016. For more information on each candidate’s platform, you can visit their official campaign websites:
Estate and Gift Tax Planning Services | Jiah Kim & Associates
The attorneys at Jiah Kim & Associates provide comprehensive estate planning services for individuals around the world. If you would like to discuss the estate and gift tax implications of your estate plan, we invite you to contact us for a confidential consultation. To schedule an appointment, call (646) 389-5065 or get in touch online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.