The 2016 presidential election campaign has witnessed several sharp points of contention between the leading candidates. Perhaps it comes as no surprise that Democrat Hillary Clinton and Republican Donald Trump take opposite positions about the estate tax. She wants to raise this federal tax significantly, he wants to eliminate it completely. What issues underlie this controversial topic?
Death And Taxes
An old saying claims life involves only two certainties: death and taxes. Perhaps in the case of the inheritance tax this statement proves true! State laws vary widely with respect to tax burdens imposed upon estates. Modifying the federal law as Donald Trump proposes likely won’t eliminate estate taxes imposed by state governments. Yet Hillary Clinton’s proposal might divert some money away from state coffers and cause it to flow to the federal government instead. Let’s examine her plan in greater detail:
Mrs. Clinton proposes imposing an estate tax upon any individual leaving more than $3.5 million to an heir. Currently, individuals pay a flat federal estate tax rate of 40% on inheritances exceeding $5.45 million. That sum occurs in addition to regular federal income taxes. The “estate tax” represents a special tax assessment made to the government whenever someone dies and leaves money to heirs.
Hillary Clinton wants to raise the rate of the estate tax, too, hiking it from a flat 40% to a graduated rate of 45% to 65%. That increase might not appear significant, until you consider that some people in upper income brackets will find themselves hit with multi-million dollar federal tax bills. Wealthy families usually engage in estate planning. Yet sudden legal changes can disrupt even very carefully planned transfers of wealth from one generation to the next.
Consider that changes to the federal estate tax rate won’t necessarily impact individual state estate tax rates unless individual state legislatures take action. States today vary widely in terms of this tax issue. Very wealthy individuals may have the ability to adjust their property holdings during their lifetimes to minimize state inheritance taxes later by selling property in states with heavy estate tax burdens and transferring their wealth to states with low estate tax rates. A federal estate tax increase would minimize the effectiveness of that strategy, of course.
Complaining About “Death Taxes”
In the past, rural families often considered themselves the chief “victims” of estate taxes. Working ranches and farms sometimes include hundreds or even thousands of acres of raw land. Congress lowered estate taxes in the past in part because the appreciation of land prices in some states meant that agricultural heirs often had no ability to pay estate tax bills without selling off farm assets (and thus cutting into the farm’s productivity).
Since the average price of a home in some “hot” urban real estate markets today exceeds $1 million (e.g. San Jose, California), Hillary Clinton’s proposal may cause some unwelcome surprises for Middle Class heirs if it becomes law soon. Of course, the ultra-rich will probably refer the issue to their tax planning experts and simply re-shuffle their holdings to minimize the estate tax impacts. Middle Class householders who pass away unexpectedly intending to leave property to their children may not prove so lucky.