Allyson Versprille in an article at bna.com, Gift Tax Tweaks Could Lead to Unsavory Avoidance Tactics, speaks of the reasons for or against repeal of the Federal Gift Tax if the estate tax is repealed as part of the Republican’s tax reform effort in 2017.
Some of her points are as follows:
Changes to the gift tax could create unintended consequences or make it easier to avoid income or other taxes using new and existing techniques. Republicans’ proposals vary—from ignoring the gift tax, retaining it as is, or repealing it altogether. Some of the impacts are as follows:
Repealing both the estate and gift taxes—with no other changes—could impact the most. Many think if the estate tax is repealed, the gift tax should be as well. But there are several reasons not to do it.
First, the gift tax backstops the federal income tax. Without a gift tax, an individual could give property to another, such as a child, probably resulting its income being taxed at a lower rate, even if sold.
Second, there would be more gaming the system. People would give away assets, but not really giving them away until death. For example, instead of giving a child $1,000,000 it could be a loan with the note given to the child at death. Neither the House GOP’s tax blueprint nor President Trump’s campaign proposal mention the gift tax. However, Trump has proposed replacing the estate tax with a capital gains tax on estates over $10 million. This would include an exemption for small businesses and family farms. (Oh, the planning possibilities start to dance in my head already.) If this change is made, it would make sense a gift would also trigger a capital gains tax.
However, how this would affect trusts set up for generations makes my head hurt. Repealing both the estate tax and the gift tax could accelerate gift-giving if it appears the estate tax is about to be reinstated. On the other hand, if estate tax repeal appears it will be permanent, Congress keeps the gift tax is retained and the “step up in basis” at death, the wealthy may not make gifts. In this case, the wealthy would hold onto their assets until death, get the step up in basis, and then allow the asset to go to the next generation with an estate tax .
Note: estate tax repeal will likely only be temporary for 10 years. This happens because of “reconciliation”. The bottom line is only 51 votes needed in the Senate as compared to 60 if will be permanent (needed to avoid a filibuster in the Senate).