The Estate Tax Problem: Since 1960 it has produced only 1% of revenues to the IRS, yet it is overly complex and extremely unfair, has closed businesses and farms, and cost jobs. In 2013 it produced less than 0.5% of revenue.
SUMMARY OF ESTATE TAX REFORM PROPOSAL (ASSET)
Opt-in: Taxpayers could opt in to a simplified method of estate tax collection that substitutes for the current estate tax and generation skipping transfer tax a combination of a prepayment surcharge (paid annually by taxpayer) and collection of capital gains taxes on estate assets whenever sold by beneficiaries. Opt in decision by a taxpayer is irrevocable. Such taxpayers would not be subject to current law estate taxes and transfer taxes.
Prepayment surcharge: Each opt-in taxpayer shall pay annually to the Treasury a prepayment surcharge until he/she dies. The surcharge shall be one percent of the taxpayer’s adjusted gross income for that taxable year. To get full benefit of opting in, the taxpayer must pay the surcharge seven years in a row before he/she is exempt, which creates an incentive to opt in at an earlier age.
Capital gains taxes: Ultimately, Treasury will receive revenue once the estate assets are sold by the beneficiaries. There is no stepped-up basis for those estate assets and carryover basis will apply. They would be subject to the capital gains tax rate in effect at the time of the sale and basis would be calculated pursuant to the prevailing laws and IRS guidance.
Transition rule: For two years after enactment, taxpayers can opt in but if they die before seven years of surcharge payments, their executors can “true up” the payments by making the missing annual payments needed to get to seven years’ worth.
- Married couples filing jointly would both be required to opt in. Secretary will promulgate regulations on how to account for marital/divorce status.
- IRS would keep track of estate assets through filing of an information return within 180 days of death of an opt-in taxpayer and the information return will include detailed descriptions of the assets and the names/identifiers of the estate beneficiaries.
- Estate beneficiaries would be obligated to report to the IRS each on the status of the inherited estate assets as part of their annual income tax return. Report would include information on the sales of any estate assets in the prior calendar year, including the amount of capital gains, if any.
Special rule for non-United States taxpayers: Assets transferred upon death from covered taxpayers to non-United States taxpayers or entities outside the United States shall not be considered estate assets and shall remain subject to the imposition of estate taxes.
Revocation of irrevocable trusts: In order to help generate productive use of assets currently held in trusts as part of an estate tax avoidance strategy, and thus to generate significant new economic development, for up to two years after enactment of the ASSET Act, there would be a general IRS policy that revocation of certain irrevocable trusts as part of opting in is not a federal tax recognition event.