I listened to the President’s State of the Union address tonight–mainly to get more insight on his tax proposals–and was dissapointed at the lack of detail. In particular, I was eager to hear him elaborate on the recently mentioned “trust fund loophole”. This wording caught my interest over these past few days and I assumed dealt with restricting rules pertaining to the use of GRATs (which he has heavily criticized in the past).
Unfortunately, his State of the Union remarks didn’t shed any light on this alleged trust fund loophole. The only comment which came close was the following:
“And let’s close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth.”
While this comment didn’t offer anything substantive, the President did release an outline of some of his expected budget proposals for 2016. In this summary, there is the following section:
Close the trust fund loophole – the single largest capital gains tax loophole – to ensure the wealthiest Americans pay their fair share on inherited assets. Hundreds of billions of dollars escape capital gains taxation each year because of the “stepped-up” basis loophole that lets the wealthy pass appreciated assets onto their heirs tax-free.
The outline then clarifies that when appreciated assets are gifted during life or bequethed at death there would be a realization even resulting in capital gains being triggered–in essence dissolving the carry-over basis rules and the date of death step-up in basis rules that have historically applied.
It’s importatnt to keep in mind that the basis step-up rule really has nothing to do with trusts. Unfortunatley, calling it the “step-up in basis loophole” doesn’t poll test well and is too jargonistic. Calling it the “trust fund loophole”, admittedly, sounds better and conveys the idea that the uber-rich are unfairly benefiting even though it is an imprecise term.