Proposed Estate Tax Changes May Impact Planned Giving

Ben BrunetteBy Ben Brunette, Selinger & Brunette

The estate tax often plays a significant role in major donors' decision to establish planned gifts. The Federal tax code currently allows individuals to transfer $5.49 million of assets to their heirs, during lifetime or at death, without estate or gift tax consequence. An approximately 40% tax applies to all gift transfers made to any person (other than a spouse or charity) in excess of this $5.49 million. Rather than pay this tax, donors sometimes make large gifts to their preferred charities.

The repeal of the estate tax, however, has been a hotly-debated political issue. Donald Trump’s early tax proposals have all included a total repeal of the estate tax.  Potential corresponding changes to the capital gains tax regime, however, may mean there are strings attached to an estate tax repeal.

Under current law, inherited assets receive a “stepped-up basis” to fair market value on an individual’s date of death.  Basis is an individual’s investment in an asset, and is used to calculate the capital gains tax due upon sale. Upon sale, capital gains tax must typically be paid to the extent the sales price exceeds basis. Therefore, inherited assets’ “stepped-up basis” enables heirs to sell inherited assets without incurring capital gains tax.

In addition to repealing the estate tax, the President’s tax proposals are rumored to eliminate basis step up at death. Instead, heirs would receive inherited assets with “carry-over basis,” meaning basis equal to prior owner of the asset.  If codified into law, this would mean many major donors may transition from planned gifts at death designed to avoid the estate tax to lifetime gifts of highly-appreciated assets to prevent heirs from paying substantial capital gains tax.  Given the size of planned gifts and the tax motivations of the major donors who make them, these developments bear monitoring for any fundraising professional discussing planned gifts with their major donors.