On January 17, 2015 the White House issued a FACT SHEET: A Simpler, Fairer Tax Code That Responsibly Invests in Middle Class Families.

One of the major recommendations included in this paper reads:
“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.”

Our first response is “What is this all about ?” Here is our understanding.
Under our current tax laws, when a person dies, his or her estate may have to pay an inheritance tax if the value of the net assets in the estate exceeds $5,340,000. The estate tax rate can be as high as 40% for an estate that has net assets in excess of the exclusion amount.
So why should this FACT SHEET say that escaping capital gains taxes is a loophole? Aren’t taxable estates subject to estate taxes which value taxable estates at fair value at the date of death, which includes unrealized appreciation, but are not at the same time subject to capital gains taxes on unrealized appreciation?

Under current tax laws, no capital gains taxes are charged on the difference between the basis (tax cost) and the fair market value of assets included in a taxable estate. This is known as a “step-up in basis” and has been in effect since 1980.

The “Fact Sheet” advocates that a capital gains tax be enacted “by treating bequests and gifts other than charitable organizations as realization events, like other cases where asset change hands.” And there is no mention of a capital gains exclusion in the amount of $5,340,000.
If we add the highest estate tax rate, 40% to a capital gains rate of 28%, we may have a combined tax rate of 68% on the difference between the fair value of assets at date of death and tax cost, otherwise known an “unrealized appreciation”. It seems to us that this is a form of double taxation.