It will be interesting to see if Trump’s tax reform proposals will be enacted. According to The Committee for a Responsible Federal Budget, Trump proposes to “reduce the corporate tax rate from 35 percent to 15 percent, eliminate most business tax breaks, tax carried interest as ordinary income, impose a one-time deemed repatriation tax on profits held abroad, repeal the estate tax, and eliminate the corporate and individual Alternative Minimum Tax. Trump’s plan would also: reduce individual tax rates from 10, 15, 25, 28, 33, 35, and 39.6 to 12, 25, and 33; expand the standard deduction from $12,600 per couple to $30,000 while eliminating personal exemptions; cap the amount of itemized deductions a couple could take to $200,000; offer U.S. manufacturers the option of fully expensing, instead of depreciating, their equipment in exchange for giving up the deductibility of interest; and tax capital gains beyond $10 million at death in place of the estate tax (small businesses and family farms exempted).” Most relevant to the estate planning world is of course the proposal to repeal the federal estate tax while taxing capital gains beyond $10 million at death. What effect will this have on estate planning?
Well, changes will take place, but the overall magnitude is yet to be determined. For 2017, the estate tax exclusion amount is set at $5,490,000 ($10,980,000 for married couples), while the annual gift tax exclusion will remain at $14,000, IRS.gov. With the current estate tax exclusion, it is estimated that only about .14% or less of decedents’ estates will be even subject to the tax. Thus, a repeal of the federal estate tax, on its surface, will have but little impact on most. However, for those in which it does impact, plan changes may have to be implemented. For example, a married couple with an appreciating estate between $5.49 million and $10.98 million or a married couple with an estate over $10.98 million may have a bypass trust in addition to marital deduction trust or QTIP trust. This bypass trust was most likely set-up to capture the exemption equivalent amount passing estate tax free, $5.49 million currently, of the first deceased spouse. With a repeal of the estate tax, that same married couple, asset protection issues aside, may want all of their assets to pass to the marital deduction trust or QTIP trust because possible appreciation of assets and possible taxation of the estate upon the surviving spouses’ death may no longer be an issue. Moreover, more assets may receive a second basis step-up upon the death of the surviving spouse (I say “more” assets because the 2nd step-up will be dependent upon the value of the assets that initially passed to the surviving spouse in the marital deduction trust, first basis step-up, and if that value exceeds $10 million. It is important to note that it is not yet clear if the $10 million capital gains exemption is per individual or per couple. The capital gains rates are at 20% for those in the 39.6% ordinary income bracket).
For the other 99.86%, will a repeal of the federal estate tax have an impact? The answer is that it may. Since the federal estate tax and gift tax are a part of a single unified tax system, it is not clear if a repeal would apply to both. If it does, the current annual gift tax exclusion may become non-existent or would become meaningless as there could be an unlimited unified credit to take advantage of in order to avoid paying tax. The end result would be massive income shifting that everyone could potentially utilize. Thus, although it is not clear whether the repeal would also affect the gift tax, it is probably unlikely. It is more likely that the lifetime exclusion and annual exclusion will remain for gift tax purposes.
Regardless of what may happen, now is a good time to review your current estate plan or to create a plan that can anticipate and take advantage of some of these changes under the new Trump presidency. Please contact me at 414-491-3283 or at David.Watson@watsonatlaw.com.