Eric Bardwell writes that proposed legislation in California may result in an federal estate tax repeal resulting in a double whammy for California residents. His article begins as follows:
With all of the talk about potential repeal of the federal estate tax1, many people have decided to postpone further estate planning, hoping that the repeal will occur. However, Californians should hold out no such hope. On February 21, 2017, California State Senator Scott Wiener announced a ballot measure, Senate Bill 726, that would create a California estate tax if the federal estate tax is repealed, equal to the federal estate tax that would have been paid by a California resident decedent. This “springing” estate tax is meant to recapture those funds for California’s schools, healthcare, roads and public transportation, according to Senator Wiener.2
California voters in 1982 voted to repeal any state inheritance or estate tax by approving Propositions 5 and 6 by votes of 61.8% and 64.4%, respectively. Senator Wiener’s proposed measure would repeal that ban. Unfortunately for wealthy Californians, history shows that the majority of voters favor increased tax on the perceived rich. In 2012, 55.4% of California voters approved Proposition 30, a “temporary” increase in the top marginal tax rate for the wealthiest Californians to as high as 13.3% to help fund education and vital services. In 2016, 63.3% of the voters extended those higher rates by passing Proposition 55. It appears, therefore, there is a realistic possibility that a ballot measure to merely “capture” the estate tax that California’s wealthiest residents would have paid to the federal government may pass.
A “double whammy” from a new California estate tax could occur if, as many believe, the cost of repeal of the federal estate tax will be that the income tax basis of a decedent’s assets will not be stepped up at death as currently provided. Thus, income taxes on the sale of appreciated assets could replace estate taxes on the value of those assets at death – except in California, and other states with a state level estate or inheritance tax, where both taxes could remain – a “double whammy.”3
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.