Issue Brief: Blue Print for Estate Tax Reform Under ASSET 2014

ASSET Proposal For Estate Tax Reformblueprint

The Problem

The value of an estate should be determined by economic and market conditions, but death should not be considered an economic event, as it is under current federal tax law.

 Where a major estate asset is ownership of an ongoing business (as opposed to publicly traded stocks and bonds or real estate), taxing assets on their value at the time of an individual’s death rather than the time of the asset’s maximum worth can have two detrimental effects.  For the heirs, it can force them to liquidate the asset/company at just the wrong time, which can mean the destruction of businesses and the loss of jobs.  For the government, it can mean loss of significant capital gains revenue that would have been realized had the asset been disposed of at the right economic opportunity in the future. 

Current law solves this problem for those estates that are worth less than $5 million (for an individual) or $10 million (for a couple).  However, it does not solve the liquidation problem for large estates, which will pay 40% on amounts above those levels.  Individuals with very large estates or who expect to accrue such large estates now spend a great deal of time and significant money on strategies to shelter their assets from the estate tax.  When these strategies are successful – the larger the estate, the more the likelihood that they will be – the government receives nothing.  That is why, historically, estate tax revenues have comprised only 1% of total federal tax revenues and 2.47% of the AGI of taxpayers earning more than $1 million per year.

 The Solution  

The ASSET Plan would give individuals the opportunity to make a “down payment” on their estate taxes during their earning years and then tax their estates at capital gains rates at the time of the  actual sale of their estate assets, no matter how long after they have died. The program would be entirely voluntary and therefore would not involve a new tax imposed by Congress.  And, by eliminating the incentive to hide assets from the IRS and to engage in unproductive strategies and avoidance schemes, such individuals will “stay within the system” and contribute their fair share of taxes to the Treasury.

The Details

Under the ASSET Plan, a taxpayer may “opt in” to the program at least seven years before death by agreeing to pay an additional 1% of his AGI each year.  Once in the system, these payments must continue through the earning life of the taxpayer, but no tax will be levied against the estate of such a taxpayer at his death. His or her assets remain intact until they are sold, at which time they will be subject to capital gains tax at the then current rate (or the rate that existed at the time the “opt in” decision was made, whichever is lower.)

Thus, individuals could choose to pre-pay a portion of their estate tax instead of spending large sums of money on sheltering activities and instead of tying up assets that they might enjoy using more productively during their lives.  The act of liquidating the estate’s assets would occur when economic conditions are optimum for doing so, not when someone has drawn his or her last breath.  As a result, the ASSET Plan generates capital gains tax returns to the government at the time when economic conditions are optimum.

The following scenarios demonstrate how it would work in different circumstances:

  • Scenario 1

Taxpayer in her 60’s makes $1.5 million per year and is expected to do so 10+ years. She has significant assets, including private businesses and real estate with an estimated value $100 million.  She currently spends $750,000 annually on planning and life insurance to avoid estate tax. Assuming annual contributions from earnings and a 5% internal growth rate puts the value of her estate at her death at $200 million.

She would opt in.  Under the ASSET plan she would pay 1% of AGI for 15 years or $225,000 total, rather than the $750,000 per year she is paying to insurance companies now. When her estate was liquidated, it would pay 20% of $200 million, or $40 million. To hold her tax at that level under current law, she would only have to shelter 50% of her estate, which would be due at her death rather than at the time of her heirs’ choosing. 

  • Scenario 2

Taxpayer in his 50’s makes $1 million in one year and is expected to earn $500+ for the next 10 years, but not over $1 million. 

He would probably not opt in.  With an after tax income of $250,000, he would be pressed add more than $100,000 to his estate each year, which would produce $2,000,000 base. Even with a compound growth he would be better off under present law.

  • Scenario 3

Taxpayer in her 40’s makes $250K per year but Is not expected to earn more than that in any coming year. However, she already owns significant real estate holdings and will have an estate valued over $5 million. 

She should opt in, unless she is married, in which case the couple’s exemption of $10 million would cover her. Given her age, it is entirely possible that her estate could be larger than she anticipates now.


The entirely voluntary ASSET proposal enables high income individuals to stop spending millions on tax avoidance and sheltering programs and preserves the value of their estates until market conditions are optimum for sale, at which time capital gains taxes would apply.  Small business owners, farmers, ranchers, and others will not have to live their lives fearing the tax liability imposed under the existing estate tax and will not have to take steps to dismantle profitable companies, sell farms and ranches, over-purchase life insurance, and waste their money on lawyers and accountants with sheltering strategies.  By taking the uncertainty of death out of the question of how and when assets should be liquidated, the ASSET Plan will contribute to economic growth and preserve the stability of companies throughout the nation.

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