Republican members of the Senate, including Sen. John Thune, R-South Dakota, Mitch McConnell, R-Kentucky, and Mike Crapo, R-Idaho, have recently reintroduced proposed legislation, the Death Tax Repeal Act of 2023, that would abolish federal estate taxes.
According to its sponsors, the bill is meant to ease federal taxes on family farms and family-run businesses and other entities after the death of their owners. It follows the Tax Cuts and Jobs Act of 2017, also introduced by Sen. Thune, which doubled individual estate and gift tax exemptions for family-owned businesses under $10 million.
Tax legislation generally raises plenty of economic, political and philosophical arguments. From a policy point of view, Thune, ranking member of the Senate Subcommittee on Taxation and Internal Revenue Service Oversight, said the repeal would "end this purely punitive tax that has the potential to hit family-run farms, ranches and businesses as the result of the owner's death."
"For years I have fought to protect farm and ranch families from the onerous and unfair death tax," he said. "Family-owned farms and ranches often bear the brunt of this tax, which makes it difficult and costly to pass these businesses down to future generations."
However, the effect of the estate tax, while potentially devastating to the family of a business owner, is not an overwhelming problem, according to Warren Racusin, partner and chair of trusts and estates at law firm Lowenstein Sandler — especially for farms and ranches.
"In real terms, in 2019 — the last pre-COVID year — about 2.8 million Americans died," he said. "How many estate tax returns were filed? Only about 6,000. How many paid any estate tax? Just 2,584. According to the Tax Foundation, less than two-tenths of 1% of deaths in 2019 had to pay any estate tax. And only 107 were in reference to farming, fishing and forestry combined."
The total federal estate tax paid in 2019 was $14 billion, according to Racusin. "In terms of the budget for 2023, that amount would pay for the annual budget of the National Science Foundation and the SEC," he said. "Of the 2,500-plus that paid estate tax, just 107 were farmers, so why is that a policy driver?"
"There is currently an exemption for $13 million," he added. "A married couple can have $26 million in assets without paying estate tax. That amount will be cut in half in 2026, but it will still protect $7 million in assets, and $14 million for married taxpayers."
The proposed law would repeal the estate tax and the generation-skipping transfer tax, but not the gift tax, so lifetime gifts could potentially be taxed. The top gift tax rate would be reduced from 40% to 35%, with an exemption of $10 million.
It isn't entirely clear how the proposed legislation would treat stepped-up basis, according to Racusin. Under current law, the heirs receive a step-up in basis, with any gain calculated based on the fair market value of property at the time of the decedent's death.
"This legislation does not seem to do that," said Racusin. "It repeals the estate tax, but it doesn't address stepped-up basis, so it seems there would no longer be stepped-up basis at death. The fact that a gift tax remains in effect and stepped-up basis is not addressed is noteworthy, but it's not clear what they had in mind. There are other proposals that would keep stepped-up basis, but this one doesn't seem to do that."
Of course, it's highly unlikely that the proposal would be enacted during this session of Congress.
"I would be surprised if it passed the Senate even if it did get by the House of Representatives," said Racusin. "It would be even more unlikely if the president signed it into law. It could be setting the stage for proposals in 2025 or 2026, introduced for political purposes. And it's also likely a 'show bill,' designed to raise campaign contributions."
"The current estate tax affects such a small percentage of Americans, and is just not a dollars and cents issue," he continued. "It does what it's designed to do, and that is that it serves to prevent the huge accumulation of wealth. A family currently gets to keep the first $26 million plus 60% of the rest. The question is whether the government should be entitled to a share of the wealth that a family has accumulated during a lifetime to prevent the vast accumulations of wealth and help fund the federal government."
