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Musings from the CEO – Winter 2015

Mike HoffmanIn the volatile tax world, there is good news and bad news. The bad news first.

President Obama is proposing to increase the tax on long-term capital gains from 23.8% on wealthy taxpayers to 28%. His proposal would also increase the tax rate on qualified dividends to 28%. There are separate capital gains schedules for precious metals, collectibles and commercial buildings, and details have not been released concerning these special provisions.

In the estate planning area, we currently have a system which increases the income tax basis of an asset owned at death to the asset’s current fair market value. Therefore, heirs can theoretically sell assets soon after inheriting them and pay little, if any, capital gain. The Obama proposal would eliminate this step-up in tax basis. The Administration has termed this tax basis step-up “the single largest capital gains tax loophole”. Capital gains taxes would be owed at death, in the case of married couple, at the death of the surviving spouse. As a “bone”, the first $100,000 ($200,000 in the case of joint filers) would be free from tax. Couples would have an exemption of $500,000 on the “gains” pertaining to their personal residence, and special provisions would prevent taxes due on inherited small-family businesses until those businesses were sold.

The President has also proposed rolling back the tax-free distribution rules on popular 529 college savings plans, which would make distributions from those plans taxable!

The Administration would require every employer with 10 or more employees to enroll workers automatically in an individual retirement account (IRA). Part-time workers would also have to be covered by company retirement plans.

Finally, the President’s proposal would limit contributions and accruals to retirement plans higher than $3,400,000. Remember, Mitt Romney was reported to have an IRA estimated between $20,000,000 and $100,000,000!

If that’s the bad news, what is the good news? Well, the good news is that the President’s proposals have almost no chance of passing. The Republican-controlled Congress generally thinks that the tax code is progressive enough, that is, taxing the wealthy at higher rates and passing those breaks on to the poor and middle class. However, once proposals are made, they tend to be bandied about for many, many years.

On the estate planning side, one of the major focuses at the present time is to maximize the amount of income tax basis assets achieve when they are inherited by surviving spouses and children. This focus is a result of the significant increase in the estate tax exemption amount, which now sits at $5,430,000 per taxpayer. Therefore, a husband and wife could theoretically be able to pass almost $11,000,000 of assets to their children before their estates incur any estate taxes. If those assets are received by the children with the highest possible income tax basis, then subsequent capital gains are minimized, as well.

In particular, we have been focused, quite frankly, on undoing some of the estate planning that was done over the last 20 or 30 years. When the applicable exemption amount was $600,000, then $1,000,000, then continued to creep higher, the fear was avoiding the 55% federal estate tax upon the death of the surviving spouse. A lot of those estates are no longer taxable (with the almost $11,000,000 of estate tax exemption referred to above). Therefore, we are looking at situations where we are getting appreciated assets back into the hands of our clients so that they can be inherited with a stepped-up income tax basis. That means we are unwinding family limited partnerships and limited liability companies, acquiring highly appreciated assets back from grantor trusts, and doing a myriad of other things that did not appear on the radar screen decades ago.

This serves as a reminder that estate planning is an ongoing process, and planning techniques that were put in place years ago should be reviewed to make sure that they still accomplish all of their desired objectives.


  • Mike Hoffman

    Mike is the founding and managing partner of Hoffman & Associates and oversees the general operations and personnel of the firm. He works primarily in the estate planning practice helping clients minimize the effect of the estate tax, ensure orderly transition of generations in family businesses, and maximize asset protections. Mike also devotes a considerable amount of his efforts to the business law and tax planning needs of the firm’s clients. He is licensed to practice in the States of Georgia, Ohio, and Tennessee, and is a Certified Public Accountant.

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