Navigating Uncertain Terrain: Start planning for changing emphasis in estate planning
President Donald Trump has a great deal of influence over a wide range of legislative matters, including the federal estate and income tax. One of his campaign promises was a repeal of the estate tax. The current structure provides that any person can transfer $5.49 million to their heirs in 2017 and pay no federal estate or gift tax ($10.98 million for married couples). Transfers made in excess of this amount will be taxed at a 40 percent rate. In addition, the majority of a decedent’s assets will receive a “step-up” in basis to the fair market value at date of death, which then eliminates most gain on the sale of these assets following the death of the asset owner.
The following are some of the proposals of the House of Representatives and President Trump regarding tax treatment related to the transfer of property upon a person’s death.
President Trump’s plan would repeal the estate tax, and eliminate the “step-up” in basis for assets that exceed $10 million. It is currently unclear if he supports a recognition event at death, similar to a capital gains tax, or a modified carryover basis similar to what was in place in 2010. The House plan would repeal the estate tax, but does not repeal the “step-up” in basis. The House plan states, “This blueprint also will eliminate the estate tax and generation-skipping transfer tax, so that the death of a family member or loved one no longer will be a taxable event.” Note the repeal of the estate tax may be a 10-year phaseout, leaving it up to the next administration to manage the issue.
Neither plan mentions repeal of the gift tax. The gift tax may be kept in place with a lower lifetime exemption (currently $5.49 million). The annual exemption (currently $14,000 per gift recipient) and tax rate of 40 percent may also be modified. Maintaining the gift tax provides a method to limit high-income taxpayers from making gifts of appreciated assets to gift recipients in lower tax brackets.
Personal Income Tax
Currently, we have seven personal income tax rates. President Trump’s plan would implement three rates — 12 percent, 25 percent and 33 percent — and his plan would maintain the current capital gains rates of 0 percent, 15 percent and 20 percent. The House plan would implement the same three income tax rates as President Trump, but they would adjust capital gains rates to 6 percent, 12.5 percent and 16.5 percent. It should be noted that both plans may help taxpayers on the higher end of each tax rate, but may pull in taxpayers who were paying taxes at the lower rate into a higher rate.
What does all of this mean for you?
Don’t stop planning! No one can predict the future. Even if the estate tax is repealed, it could be reenacted in the future, so your estate plan and trust documents should be flexible enough to take into account both possibilities. However, one thing is for sure: If we do nothing, life for our loved ones could become even more difficult after we pass away. So even if the estate tax is eliminated, there are many aspects of estate planning that remain, and some that are likely to become more significant, such as state and federal income tax savings, protecting wealth from creditor claims and divorce, and addressing incapacity.
With the anticipated changes in the tax law in the coming months, it is recommended that you contact your CPA or tax attorney to discuss any upcoming events in your life, including retirement; changes in circumstances of family members due to marriages, divorces, births or deaths; business succession planning; or an anticipated purchase or sale of a business. In addition, non-tax provisions of your trust should be kept current, which may include revised distribution provisions or modifications in order to take advantage of changes in the state law governing trusts that have been enacted since your trust was last reviewed.
Cathy Shoemaker, CPA MBA/MST, is a principal with Rehmann’s TC office and regional leader of estate/gift/trust taxation.