Estate Tax cut - a raise in taxes for the non-wealthy?

[Jersey Devil]

Hardly anyone pays estate taxes. You have to have over $2 million to begin with ($4 million for a married couple) to even have to file an estate tax return. Something like 99.74% of Americans will never have to worry about it. So cutting estate taxes is a break for the wealthy, pure and simple.

But I have read that cutting the estate tax altogether would cost over $1 Trillion over the first 10 years. So, how will the government make up for those lost revenues?

I am not sure about this, but I think it will come from an increase in capital gains taxes that will mainly impact the non-wealthy. Perhaps some CPAs out there might want to chime in on this and straighten me out if I am wrong.

I know, for instance, that when someone dies there is a stepped up basis for capital gains purposes under existing federal tax law. For instance, if someone buys a house for $100,000 and then dies 20 years later with the house worth $1,000,000, and the beneficiaries of the estate sell the house for $1,000,000, there would be no capital gains tax paid whatsoever because the tax basis for the home would be its market value on the date of death.

But if the federal estate tax is eliminated completely, wouldn't the stepped up basis for capital gains taxes also be eliminated, thereby forcing the heirs to use the original purchase price as the tax basis? (Note also that the heirs would not be entitled to any exemption from taxes as an individual would if they lived there for 15+ years or was over 55 years old since it was not the heirs' residence.)

If that is the case then elimination of the federal estate tax would be a stealth increase in capital gains taxes for over 99% of Americans. Someone please fill me in if my understanding is incorrect.

[shain from kane]

1. I believe that a previous proposal would have allocated the current

$2 million exemption(that would no longer exist, but would be given effect)to the various assets in the person's estate. In other words, loss of the stepped-up basis would occur, except for the $2 million, in effect, being a substituted stepped-up basis amount to be add to a variety of assets. For people with small estates, the additional exemption added to the cost basis would increase the relevant basis to the fair market value, for future reference.
However, I believe that the larger estates would still have to file something with the Treasury Department, because the heirs would have to choose how to allocate the $2 million substituted exemption. There just wouldn't be any federal estate tax at the estate level. There would still have to be a listing of assets (and possibly liabilities?), so lawyers would still have a function in the process. They may have to referee between the heirs in any specific allocations
Of course, the medium-sized estates would also have to be valued, to determine whether any portion of the substituted exemption is applicable.
And the original basis of certain assets would have to be determined, from often non-existent records, and the information would have to be provided to the heirs.
And there is no guarantee that the states will abide by any of these new proposals, since currently the states determine their share with reference to the federal estate tax return.
In the final analysis, such a change could create a big mess, and add cost to the administration of estates.