The “Angel of Death” Tax Loophole
This week’s guest blogger is Susan Murphy, CPA, a tax manager in the Boston office of WithumSmith+Brown.
At his State of the Union Address earlier this year, President Obama identified the “Angel of Death” tax loophole as one of his major agenda items for 2015. “Angel of Death” – very ominous sounding! What does it mean for you? Has any progress been made toward President Obama’s goal of eliminating this loophole? 
Internal Revenue Code (IRC) § 1014 or the “step up in basis” as it is more commonly known, is our President’s vilified Angel of Death tax loophole. In general, this code section allows for the passage of property from a decedent to his/her intended heir with a basis equal to the fair market value of the property on the date of death of the decedent. Therefore, low basis assets remaining in an estate are transferred to the heir(s) at current market value. What a boon for the beneficiary (hence the targeting by the President!) If later sold by the heir, there is no long term capital gain assessed for the period of appreciation that occurred during the decedent’s life time. Post death taxable consequences arise only for the period of appreciation that occurred while in the hands of the heir.
In late 2012, the tax law was significantly altered with respect to transfer taxes, incorporating (among other changes) a permanent increase in the top tax rate to 40%, an increase in the lifetime exemption to an inflation-adjusted $5,000,000 [1] and the introduction of portability [2] to the estate planning arena. These are all game changers and, except for the increase in the top tax rate, fairly taxpayer-friendly, especially for smaller estates. If you have not reviewed your existing estate plan and will since the law changes, now is a good time to do so.
Unfortunately, these game-changers also make the already-existing “Angel of Death loophole” more pronounced and subject to criticism which, in all likelihood, will not go away.
However, it is now nearly September. Has President Obama’s tax proposal to increase capital gains tax in this area seen any significant progress? According to political pundits (of which I am not one), the answer is a resounding no. Nor will it be likely, due to our currently Republican controlled Congress. Stay tuned….
[1] 2015 exemption is $5,430,000.
[2] Portability is defined as the amount of unified credit NOT used in the decedent spouse’s estate and therefore available for use for gift or estate tax purposes by the surviving spouse. (IRC § 2010). More on this nifty feature in future blogs.
