I have a bet for a free lunch with one of my clients who insists that the estate tax exemption will go down in the next year.  His rationale makes perfect sense – will all of the government’s spending, it will need a revenue source.  Despite this logic, I have steadfastly argued for stability of the estate tax exemption at $3.5 million.

It turns out that we both may be wrong.  House Democrat Rep. Schrader has introduced H.R. 3841.  This bill, which has been referred to the Committee of Ways and Means, would increase the estate tax exemption to $5 million (yes, INCREASE), repeal carry-over basis and reduce the top estate tax rate to 45% (yes, DECREASE).  The rules specifically about the estate tax may relate to the reality that the estate tax does not affect a large population and frankly does not generate a lot of revenue when considering the government’s budget.

What is more interesting is the possibility of repealing carry-over basis at death.  Presently, when someone dies, the fair market value of his assets at the time of death becomes his beneficiary’s cost basis for determining a subsequent gain or loss.  For example, Jack owns 100 shares of Coca Cola that he bought for $1,000.  At the time of his death, those shares are worth $1,500.  If his beneficiary sells those shares for $1,500 the day after his death, there is no gain.  Under H.R. 3841, there would be a gain of $500 – taxed at the then applicable capital gains rate. 

If you think about it, this bill is actually logical – the estate tax affects very few, but capital gains will affect many more people.  If government spending continues, then looking for taxing opportunities from a larger tax basis is obvious.

No matter what the law change may result, it appears that it will happen this year.  If it does, then I think that I will be able to collect on my bet!