Watch Out! For Possible Wealth Tax Changes

by Michael Trainotti

Senator Scott Wiener (D-San Francisco), in late March 2019 introduce his proposed legislation is modeled on the federal estate tax but would lower the exemption rate to $3.5 million, which is lower than the federal estate tax exemption. Senator Wiener introduced Senate Bill 378 at the end of March. If the bill is passed, it would result in a special fund designed to improve socioeconomic equality in the state.

With the lowered exemption rate of $3.5 million, or $7 million for a married couple, the proposed estate tax would phase out at $11.4 million for an individual or $22.8 million for a married couple, which is the current federal estate tax exemption rate. By phasing out at the federal estate tax exemption, the bill would prevent California residents from being double-taxed. In other words, estates would be taxed by California if they range from $3.5 million to $11.4 million. In addition, similar to the federal estate tax, SB 378 has exemptions, including for transfers to a surviving spouse, and for family farms.

If the California legislature passes SB 378, it will appear on the ballot in November 2020. This would not be the first time that an estate tax measure appeared on the California ballot. California residents approved a ballot measure in 1982 that prohibited an estate tax. Accordingly, in order to put an estate tax in place in California, voters in the state need to approve it in a ballot measure.

On the federal level this is the same area where some of the presidential candidates want to change the current $11.4 million for an individual or $22.8 million for a married couple, if they are elected president in 2020.

What this all means is the current estate planning does not worry about estate tax (popularly called the “death tax”) but instead is now more focused on obtaining a step up in basis for income tax purposes.  This could possibly change after the 2020 national and state election. 

What should you do now, if anything?  Some nationally known commentators are recommending making gifts to family members today.  The idea is to freeze values today and shift your wealth appreciation over to your family.  The commentators point out that there will be no “claw back” under new treasury regulations, Reg 106706-18 when using the enhanced gift tax exemption of $11,4 million today.  For example, if you used $100,000 today of the $11,4 million and the exemption amounts change later to a lesser amount of $3,5 million below the current $11,4 million, the $100,000 gift is not reduced from the $3,5 million.   Today you can discount value of assets which may not be available after 2020.

Michael Trainotti, Inc., A Law Corp
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