The Federal Estate Tax May Be on the Chopping Block—But What Is It, Exactly?

One of the regular campaign promises President Donald Trump made on his way to the White House was a repeal of the estate tax, commonly referred to by critics as the “death tax.”

Its repeal would be a controversial decision for a variety of reasons, with many proponents of the tax arguing that it would make more economic sense to increase it.

Simply put, the estate tax is a fee a decedent’s estate must pay if the value of the estate exceeds $5.49 million per person ($10.9 million for a couple). In an average estate tax situation, beneficiaries pay about 17 percent, although it’s possible to pay a rate of nearly 40 percent.

Not many people are affected by the estate tax, as it requires one to have a particularly valuable estate. Only about 5,000 estates out of the estimated 2.7 million deaths that occur each year in the United States must pay estate tax at all. This makes it an effective means of fundraising, as it’s unlikely to have any accidental economic consequences on people not impacted by it.

Arguments for and against the estate tax

Those who are in favor of the estate tax say it’s one of the best tools the government has to help reduce income inequality, which is currently at its highest levels since the 1920s. Because only the ultra-wealthy must pay the tax, that money can go toward programs that benefit all Americans.

Additionally, heirs to estates of any size do not pay income taxes on their inheritance. This means a repeal of the estate tax would mean this sudden wealth gained by heirs would never be taxed at all, throughout their whole life.

The most common argument in favor of repealing the estate tax is that people should not have to pay a tax to the federal government to receive money or assets a loved one has willed to them. The pejorative term “death tax” is used to emphasize the idea that, in critics’ eyes, having an estate tax punishes wealthy people for passing away, removing a significant percentage of the money and assets they earned throughout their lives.

If the Trump administration succeeds in repealing the estate tax, there is nothing to say states could not implement their own estate taxes. California, for instance, has already planned its own significant increase in its estate taxes if a repeal happens on a federal level. And, while the federal estate tax itself might be repealed, it could be at least partially replaced in the form of capital gains or other taxes.

For further information on the estate tax and how it could affect your estate planning process, speak with an experienced New York attorney at Lissner & Lissner, LLP.