The Estate Tax – It Will Not Go Quietly into the Night


One of President-elect Trump’s promises is to eliminate “death” taxes – the estate and generation-skipping transfer taxes. Donald Trump’s website indicates he opposes the estate tax because “American workers have paid taxes their whole lives, and they should not be taxed again at death” and it “falls especially hard on small businesses and farmers.

In place of transfer taxes, President-elect Trump proposes a capital gains tax at death on asset appreciation over $10 million.

Thus, there would no longer be a 40% tax on the value of assets above the unified credit applicable exclusion amount. Instead there would be a 20% tax on asset appreciation.


This very rough outline on President-elect Trump’s website leaves a few questions:


  • Will the $10 million exclusion be for each person, and will it be indexed for inflation?

  • Will the $10 million exclusion be transferrable between spouses, similar to the current portability of the unified credit amount for estate and gift tax?

  • Will the assets below the proposed $10 million exclusion receive a step-up in basis when they are passed on to the recipients? Alternatively, will these assets receive an adjustment in basis in the hands of the recipients for the taxes paid by the estate on the appreciation above the $10 million exclusion? If so, how will the taxes be apportioned between assets in the estate?

  • What happens to lifetime gifts of appreciated assets? Will there be a deemed sale (or realization event) at the time of the gift? If there is no deemed sale, will the current rule of carryover basis under §1015 still apply so that the recipient will still pay any capital gains due at the time of sale, using the donor’s basis?

  • If a gift of appreciated assets is made shortly before death, will the appreciation included in the gift be subject to the capital gains tax? Would there be a minimum period between the date of the gift and the date of the taxpayer’s death to avoid the capital gains tax on appreciation, or would it be possible to transfer appreciated assets just before death and avoid the proposed application of the capital gains tax?  

Two things are certain, however. First, the estate will still have to prove the basis of the asset at death. Second, the estate will still be required to determine the appropriate value at the time of death to determine an asset’s appreciation.

There are plenty of pundits out there with opinions on the merits of President-elect Trump’s proposal. Rather than discuss the pros and cons of the plan, I believe one of the major difficulties of implementing this plan will be in valuing appreciation.

I previously commented on the case of Estate of Richmond v. Commissioner. The case involved Mrs. Richmond’s interest a family holding company, formed as a corporation in 1928. Because the goal of the corporation was to maximize dividends and minimize capital gains, it held stock, on average, for 70 years. One of the issues in the case was the appropriate discount to be applied for the potential capital gains tax on the appreciated assets. The appreciation represented 87.5% of the total value of the corporation’s holdings.

How would Ms. Richmond’s estate fare under the proposed system? Because of the unusual circumstances of the portfolio turnover rate, the amount of built-in capital gains, and the payment of capital gains tax at the corporate level, would Ms. Richmond’s interest be taxed at the proposed corporate rate of 15% (or possibly a lesser rate for corporate capital gains if President-elect Trump proposes one)?

The question of how to value the asset appreciation still remains. Ms. Richmond had a minority interest, and no ability to direct asset sales against the corporation’s stated purpose. Would Ms. Richmond’s interest be entitled to additional discounts for her minority interest and lack of control because it is only a “deemed” sale? The question is essentially one of valuing the corporation’s assets versus valuing Ms. Richmond’s interest in the corporation. The circuits are split on the appropriate approach (see the Richmond blog for the details). However, it is apparent that this relic (or incredibly insightful) structure for transferring family wealth could have value for estate planning purposes if Mr. Trump’s proposals are adopted, albeit with a more modest result.

For a second recent case, I looked at the potential problems that may arise in determining the value of a continuing business. Estate of Giustina v. Commissioner involved the issue of how to properly value partnership interests. In overruling the Tax Court, the Ninth Circuit Court of Appeals held that Mr. Giustina’s partnership interest in an ongoing business should have been valued using only a cash flow analysis rather than including the value of the underlying partnership assets as a deemed liquidation. In Giustina, the appreciation was all held within the partnership. The proposed capital gains tax has two stumbling blocks to overcome when applied to Giustina. First, how would the interest in the appreciation of the capital be valued, when the interest to be valued is the potential cash flow of the business? Second, how is the capital gains tax paid?

The answer to the first question is likely a present value calculation, although courts would tinker with inputs and add discounts or premiums, as appropriate. The seemingly simple present value formula can be endlessly manipulated, and taxpayers, the IRS analysts, and the Tax Court are all aware of that. In addition, the deemed appreciation may be affected by various discounts depending on the decedent’s ability to direct the activities of the partnership prior to his death. The end result is likely to be similar to what happens now in estate tax cases, albeit with a lesser tax rate.

Assuming there is cash outside of the ongoing business to pay the capital gains tax on the deemed sale of the partnership interest, there should not be withdrawal of estate’s interest. That is a big qualifier. Unlike an actual recognition event, there is no cash coming in to pay the capital gains tax. Thus, this tax payment would have to be planned for (e.g., life insurance), or interests would have to be liquidated to pay the tax. Assuming the $10 million exclusion for these death realization events, there will be some liquidation of the business or farm if, as is generally true for small businesses and farms, the decedent’s principal asset is the business. Finally, how would the nonimposition of the capital gain tax on the $10 million excluded appreciation be reflected in the partnership’s capital accounts?

What becomes apparent is that while under President-elect Trump’s plan the computation of the estate tax would change, the same valuation games will still be played.


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