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What does Trump's plan to abolish estate tax mean for collectors?

The plan could be a mixed bag for both wealthy market players and cultural charities

by Helen Stoilas, Sarah P. Hanson  |  27 April 2017
What does Trump's plan to abolish estate tax mean for collectors?
Treasury Secretary Steven Mnuchin, right, and National Economic Director Gary Cohn, brief the press at the White House on Wednesday, 26 April (AP Photo/Carolyn Kaster)
President Donald Trump’s tax reform plan, revealed on Wednesday by the US Treasury Secretary Steven Mnuchin and Gary Cohn, the director of the National Economic Council, includes the elimination of the estate tax, a move that would impact both wealthy collectors and cultural charities.

Some form of inheritance tax, or as its opponents dramatically like to call it, the “death tax”, has existed in the US for most of its history. Currently, an estate has to be worth at least $5.49m before it starts being taxed by the federal government. While the top rate for the tax is 40%, the average paid on such estates is around 16.6%, according to the Urban-Brookings Tax Policy Center. Many of America’s richest, however, tend to set up trusts to protect their legacies from the taxman. Republicans have long wanted to to eliminate it completely.

“At first blush, this seems like it would be great for collectors,” says Donn Zaretsky, a lawyer with John Silberman Associates in New York. "You get to pass down your art collection free of estate tax—what’s not to like?  But during the campaign, there was talk of also eliminating the so-called step-up in income tax basis as part of the deal. If that’s still part of the proposal, then it’s more of a mixed bag for collectors.”

Using the step-up in basis allows beneficiaries to lower the capital gains tax on assets they inherit that have grown in value. Currently, “older collectors sitting on art that is appreciating in value are reluctant to sell. They’re waiting for those assets to transfer to their estate,” says Doug Woodham, a wealth advisor and former Christie’s executive who recently published a primer for new collectors, Art Collecting Today: Market Insights for Everyone Passionate about Art. “If estate tax goes away, collectors will either pay more in capital gains tax, or their heirs will. I would think you’d see more people saying, ‘Maybe I should sell now.'”

But while the market might see more turnover in the short term, in the long term, elimination of estate tax would also eliminate a powerful incentive to sell. Barbara Lawrence, a lawyer with the New York firm Herrick Feinstein, says that while “there’s no way of knowing” how Trump’s proposals may take effect, if the estate tax were repealed, "I think a lot of collections would actually not go up for sale,” she says. “While wealthy collectors may have more money to spend, there may not be much inventory to spend it on."
 
Cutting the estate tax could also negatively impact museums and universities, since they often receive bequests from wealthy patrons and alumni who are motivated to reduce their taxable assets before they die. “The estate tax that has been a favourite issue of the Republican congress for many years,” Nina Ozlu Tunceli, the Chief Counsel of Government and Public Affairs and the Executive Director for the Americans for the Arts Action Fund told us in January. “You could talk to any university [about cutting it] and they would lay down on the floor over that.” Lawrence notes, however, that Trump’s proposal preserves the deduction for charitable gifts, which could lessen the repeal’s impact.
 
The estate tax is also a way for the government to generate substantial revenue. According the Center on Budget and Policy Priorities, the estate tax would generate about $275bn through 2026 under current law. “While this is less than 1% of federal revenue over the period,” the center reports, “it is significantly more than the federal government will spend on the Food and Drug Administration, the Centers for Disease Control and Prevention, and the Environmental Protection Agency combined.”

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