Yesterday the Senate rejected a partisan proposal to permanently repeal the Estate Tax- a move that would greatly benefit the extremely wealthy and punish anyone with an estate less than $3.5 million. What gets lost in the "lost the family farm" rhetoric (find one example, please?) is that the current law eliminates for the most part the biggest tax give away to the middle class that ever existed: the step up in basis that happens when someone dies. It never ceases to amaze me that clients with estates well under $7 million (for a couple) somehow believe that the estate tax is some kind of an evil. For them, it is a blessing to their heirs.
Let me give you an example. If you have a property you bought for $1,000,000 and it is now worth $3,500,000 (possible in many states, particularly here in California), if you sell that property you will pay income tax on $2,500,000 (at a capital gains rate). Under the law that existed last year- and that the Administration wants to keep in place-when you die the basis of that property goes to the fair market value on your date of death ($3.5 million). If your kids then sell it, they pay NO tax of any kind- they get $3.5 million tax free!
Guess what- the current law, which was a highlight of the Bush Tax legislation, for the most part does away with the step up in basis- so your kids would pay tax when they sell the property on all that accumulated gain ($2,500,000). So be careful what you wish for- the tax on the middle class will increase dramatically if we permanently do away with the Estate Tax.
There seems to be sentiment in Congress to raise the exemption to $5 million and to keep the Estate Tax. Unfortunately the issue gets lost in scare tactic rhetoric directed to people who will never come close to paying a tax- but will suffer significantly if the tax is repealed.
