The Trump Administration – GOP tax reform plan recently released calls for a repeal of the death tax also known as the federal estate tax. Currently, federal estate tax is paid on estates with gross assets and prior taxable gifts exceeding $5,490,000 in 2017 and will increase to $5,600,000 in 2018 (www.irs.gov). Keep in mind that the repeal of the death tax does not affect inheritance and estate taxes at the state level. In the Commonwealth of Kentucky, state inheritance and estate taxes are paid on Class B and Class C beneficiaries (www.revenue.ky.gov). There is no inheritance and estate tax at the state level in the Commonwealth of Kentucky for Class A beneficiaries. Class A beneficiaries include: surviving spouse, parent, child, grandchild, brother, sister, half-brother and half-sister. Class B beneficiaries include: niece, nephew, half-niece, half-nephew, daughter-in-law, son-in-law, aunt, uncle and great-grandchild. Class C beneficiaries include all persons not included in the Class A or Class B beneficiary designations.
Under current law, taxpayers get a step-up in the tax basis of inherited assets. This has the effect of avoiding capital gains tax on any appreciation the deceased earned before death. However, if a repeal of the estate death tax occurs, the step-up in basis would go away as well, thus requiring heirs to pay capital gains tax on inherited property.
If a repeal of the estate death tax were to occur, this does not negate the need for proper Estate Planning for several reasons:
- Your still have to designate who will receive your estate upon your death
- If you have minor children, you still need to designate a guardian to care for your children upon your death
- You still need designate a trustee to manage the assets going to minor children or any individual you do not want to receive a share of your estate outright