President Obama laid out his proposed agenda in last week’s State of the Union address. Among the many initiatives his administration is proposing, the most significant to estate planning are the tax increases.
The President proposed eliminating what Michael Kinsley called the “Angel of Death” loophole. Under the current tax code, if you bought stock at $10/share and when you died that stock in your estate was worth $100, no long term capital gain would be owed on the $90 gain in value over your life. If however, the President’s proposal were adopted, the $90 would be taxable at applicable long term capital gains rates.
There would of course be many exemptions and complications, but that is the main idea. For example, the President has proposed an exemption for the first $100,000 of capital gains tax per individual ($200,000 for couples), which would eliminate all but the more wealthy estates. The President is proposing many other tax increases including increasing the top rate for long term capital gains tax and taxing certain 529 plan distributions, among others.
Given that Congress is under Republican control, these proposals aren't expected to be considered. Many interpret this proposal as a way to frame the political debate for the coming elections. However, Congress will do its best to prevent a return to gridlock, and this may prod some action in the tax code. This will be an important conversation to monitor this year because of its potential to significantly affect estate plans.
Update 1/30/2015: The Obama administration has dropped the 529 Plan tax from its proposal. For more information, see David Wessel’s article in the Wall Street Journal.
This is not intended to be legal advice and does not form an attorney-client relationship with any reader.