Recently, key Republican Senators including John Thune of South Dakota, Mitch McConnell of Kentucky, and Mike Crapo of Idaho have re-proposed the Death Tax Repeal Act of 2023. This legislation seeks to eliminate federal estate taxes, with the goal of alleviating tax burdens on family-owned farms, businesses, and other organizations after the passing of their owners. The Act follows in the footsteps of the 2017 Tax Cuts and Jobs Act, also championed by Sen. Thune, which substantially increased individual estate and gift tax exemptions for family businesses under $10 million.
While tax legislation often sparks debates on economic, political, and philosophical grounds, Thune, a leading figure in the Senate Subcommittee on Taxation and Internal Revenue Service Oversight, argues that the repeal is essential to halt a tax that could unfairly impact family enterprises upon the death of the owner. Thune asserts he's long defended farming and ranching families from this burdensome tax, which can create hurdles in passing down these businesses to future generations.
However, the impact of the estate tax is not as critical as it seems, claims Warren Racusin, a partner and head of trusts and estates at Lowenstein Sandler law firm. His argument rests on 2019 data, indicating that only a minute fraction of the deceased (less than 0.2%) paid any estate tax, with a mere 107 related to farming, fishing, and forestry combined.
Racusin points out that the total federal estate tax paid in 2019 equaled $14 billion, enough to fund the annual budgets of the National Science Foundation and the SEC. With only 107 farmers among those who paid the estate tax, he questions its policy relevance. He also highlights the existing exemption of $13 million for individuals and $26 million for couples, due to be halved in 2026, but still covering $7 million in assets for individuals and $14 million for couples.
The suggested legislation aims to repeal the estate tax and the generation-skipping transfer tax, but not the gift tax, which means gifts given during one's lifetime could still be taxed. The maximum gift tax rate would drop from 40% to 35%, with an exemption of $10 million.
Racusin notes ambiguity in the proposed legislation's handling of stepped-up basis, a method used to calculate gains based on the fair market value of property at the time of death. He observes that the bill fails to address this, which may imply the removal of the stepped-up basis at death.
Despite the controversy, the likelihood of the proposal becoming law in this legislative session is low, according to Racusin. Even if it does pass the House, it may struggle in the Senate, and presidential approval appears even more doubtful. The bill may merely be setting the stage for future proposals or acting as a 'show bill' to attract campaign donations.
Racusin concludes by arguing that the current estate tax, affecting only a small percentage of Americans, is effective in its purpose of preventing vast wealth accumulation. The question that remains is whether the government should claim a portion of a family's lifetime wealth accumulation to curb wealth disparities and support federal funding.
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