I won’t waste much time on the President’s recent tax proposals because they will probably go nowhere, but I am compelled to comment on the reference in the fact sheet describing the tax proposals in the State of the Union address to a “trust fund loophole.” Here’s how the fact sheet describes it:
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.
This is about the tax rule that when you die and leave an asset to someone else, the recipient gets a new tax basis. That means that when the recipient sells the asset, they pay capital gains tax on the difference between the sale price and the value of the asset when they inherited it from you, not the value of the asset when you acquired it. This is known as a step-up in basis.
So what does the step-up basis rule have to do with trusts? Absolutely nothing. The “trust fund loophole” label dreamed up by the White House – I have never heard the step-up basis rule called that before – is a way to give the impression that this “loophole” is something that benefits only rich people. Because only rich people have trusts, right?
Garbage. First of all, the step-up basis rule applies to anything that is inherited, even if the person who owned it didn’t even have a will, let alone a trust. And as for the premise that trusts are only tax-avoidance vehicles for the wealthy, I prepare dozens of trusts for clients every year. Only a small percentage of those clients are wealthy, but lots of them own things that they want to leave to their children, things that will be worth a lot more when the clients pass away than they were when the clients acquired them. The notion that only rich trust beneficiaries benefit from the step-up basis rule is false.
The “trust fund loophole” label is, to put it bluntly, dishonest. It’s a way to portray the step-up basis rule to people who don’t know anything about it in a way that will persuade them that it is unfair.
It reminds me of the “fake but accurate” justification for political dishonesty, only this time in the context of tax law.