The political circus in Washington takes center stage for the wealth industry as the House of Representatives passes a bill pushing to double estate tax exemptions.

While Benjamin Franklin’s famous line of death and taxes being inevitable remains true, Congress took a step nearer towards easing the estate tax burden on wealthy individuals yesterday and the US administration of Donald Trump continues to push to repeal estate tax.

Vice President Mike Pence reportedly said yesterday that “death should no longer be a taxable event”, speaking at the annual dinner of the Tax Foundation, a pro-free market policy group that has urged reforms and cuts. Pence promised that plans in Congress to overhaul tax will scrap estate tax (source: Bloomberg, other). 

The House of Representatives yesterday voted to double exemption thresholds for estate tax from the current position where a 40 per cent levy affects estates worth over $5.49 million for single persons and $10.98 million for couples. The House also wants to repeal the tax; by contrast, a measure in the Senate would double thresholds but any changes would be temporary and end in 2026, reports say. 

The Tax Foundation hailed the House’s bill as “a big step forward toward comprehensive tax reform”. “The bill makes a number of noteworthy changes and would, according to our Taxes and Growth Model, increase GDP, raise wages, and create more jobs,” it said.

Other groups were more critical. It has been argued that doubling estate tax exemptions could blunt the philanthropic urge unless incentives remain. Analysis by the Center for American Progress, a left-wing policy and lobby group, said eliminating the estate tax would reduce the amount people give to charity in their wills by $7.8 billion in 2024. The argument centers around the idea that without tax breaks, the desire to give to charity will fade.

The House and Senate will have to compromise on a final package before sending it to President Trump for his approval. 

Wealth planning potential
Speaking to Family Wealth Report a few days before yesterday’s vote, Lisa Featherngill, head of Wealth Planning for Abbot Downing, said a doubling of estate tax exemptions provides wealthy persons an opportunity to make large gifts in the next several years. 

Although far from a done deal, clients should “start thinking now about how much of this additional exemption they can afford to use”, she said.

Highly wealthy people will want to leverage that exemption, such as funding a trust with the exemption and use that trust to buy additional return-generating assets; the purchase can be effected, for example, via a note. 

With the doubling of estate tax exemptions, only about 1,000 people in the US will pay it. In absolute terms, given wealth patterns, this will still comprise a very large sum of money, taken together, Featherngill continued. Asked if proposed cuts to estate taxes and other measures to flatten taxes – and remove some old breaks – would actually reduce charitable giving, as some have predicted, Featherngill demurred: “I have never found a client who has said I am going to give to charity to avoid tax.”

With commentary about widening wealth inequality in certain developed nations, the US is particularly in the spotlight, given worries about allegedly sluggish upward mobility and mixed fortunes of the economy since the financial crisis of 2008. According to a recent study by Citigroup, for example, the US has one of the highest Gini coefficients – a standard measure of wealth inequality – in the developed world, at 0.45. (The coefficient ranges from 0 (or 0 per cent) to 1 (or 100 per cent), with 0 representing perfect equality and 1 representing perfect inequality. Values over 1 are theoretically possible due to negative income or wealth)

The estate tax is defended by certain group such as The Center on Budget and Policy Priorities, a think tank that says it is bi-partisan and has a focus on low-income taxpayers. It argues that the levy is justified because it “limits, to a modest degree, the large tax breaks that extremely wealthy households get on their wealth as it grows, which can otherwise go untaxed”. 

Such claims are controversial: opponents of such “death taxes” in the US and elsewhere say that individuals and families hit with the tax have already paid taxes as the wealth was amassed, such as on capital gains, sales, income and certain other transactions. It is also claimed that if such wealth was created legitimately, confiscating a chunk of it simply because it creates an unequal pattern of distribution at any one point of time is arbitrary and unjust. A complicating factor is that central bank quantitative easing post-2008 inflated asset prices, with the wealthiest arguably benefiting disproportionately.