The election of Donald J. Trump as the 45th American President was largely unexpected, and it is difficult to precisely forecast the tax changes which are ahead. President-elect Trump has proposed wide ranging changes to the U.S. tax system which will affect virtually all Americans and tax advisors.
Down-ticket Republicans were also victorious in the elections on Tuesday. The House of Representatives is controlled approximately 239 to 192 by the Republicans (a majority is 218), and the Senate is controlled approximately 51 to 48 by the Republicans (a majority is 51). (Louisiana runoff elections are still to be decided in December.) The Republican majorities in the House and Senate will make it more likely that many of Trump’s proposed tax changes could be enacted.
However, there are other perspectives that leave the tax community looking for tarot cards and crystal balls for guidance, particularly for planning which is in-process:
- Although the strength of the Republican success was significant, some suggest that it may not assure Trump the support to push all legislation he proposes to enactment. Trump, according to this view, may have to spend time building bridges with not only Democrats, but those in his own party.
- Another perspective some have suggested is that under the rules of Senate parliamentary procedure, a Senator can filibuster virtually any bill (unless 60 Senators vote to end it). However, a filibuster does not apply to a budget bill that uses the so-called “reconciliation” process, so that may present an option for Trump to circumvent a filibuster should one occur.
- With the array of substantial legislation a Trump administration might propose, the inevitable horse trading will almost assuredly shape any actual legislation enacted.
- As we just learned from the election, political matters are often very difficult to forecast. Although the Republican platform has long advocated for estate tax repeal, and although Trump has included it as part of his plan, there is no assurance it will happen.[i]
In this flash eAlert, we are not going to attempt to discuss all of the possible changes to the tax system as doing so would involve a great deal of speculation about a wide variety of topics. We will instead concentrate our comments on what is known about the current environment surrounding the issue of estate tax repeal.
- 1. President-Elect Trump has proposed repealing the estate tax. Donald Trump’s campaign included a proposal to repeal the “death tax.” However, his plan actually would just replace the estate tax with a capital gains tax for estates in excess of $10 million. It is unclear if the proposed capital gains tax would be imposed when the assets are transferred at death, or when the assets are sold by the heir. It is also unclear if the first $10 million of assets would receive a stepped-up basis or a carry-over basis. Also, in contrast to the House Republicans’ plan (discussed below), Trump’s proposal would repeal the gift tax.[ii]
- 2. The House Republicans proposed a repeal of the estate tax (again). In April 2015, the House of Representatives passed the “Death Tax Repeal Act of 2015” (H.R. 1105). If this were to become law, this Act would completely and permanently repeal the estate and generation-skipping transfer taxes and would retain the gift tax with a 35 percent rate (for cumulative gifts over $500,000) and an exemption of $5 million indexed for inflation. While eliminating the estate tax, the bill would also retain a stepped-up basis for transfers made at death. This aggressive combination would be a win-win for taxpayers but, as Jonathan Blattmachr, a New York attorney and tax and estate expert put it, “realistically, that’s not going to go through.”[iii]
- 3. Any change to the law would have to go through a complicated legislative process.
- the repeal and replacement of the Affordable Care Act (a/k/a Obamacare),
- a pending Supreme Court nomination,
- immigration reform (and the construction of a “wall” on the Mexican border),
- entitlement reform; renegotiation of trade pacts (like NAFTA and the Trans-Pacific Partnership), and
- a complete overhaul of the individual and corporate income tax codes.
- 4. The estate tax is not primarily about revenue generation.
What do we recommend?
For clients who have existing planning in place:
- If you need to make changes in distribution provisions, or Executors, Trustees or Guardians, go ahead and make these changes. It is important for your planning to reflect your wishes and current family needs. These changes are typically simple and inexpensive, and they should not be delayed.
- Until more is known about the Trump estate tax proposals, it may be premature to modify the tax planning and allocation language in existing documents. Until there is a law change, these provisions of your documents are proper and appropriate, and based on current law.
For those who have not started their planning:
- The Trump estate tax proposals, if enacted, would not eliminate the need for wealth planning. While the estate tax can influence how such plans are drafted, preserving and protecting wealth is equally, if not more so, about preparing for unexpected events, potential spendthrift heirs, and an environment of ever-increasing litigation.
- We will approach these projects on an individual, case-by-case basis. In some instances, a “wait and see” approach will be appropriate and most efficient. In other cases, there are opportunities in the current law that may be lost if planning is delayed. Do not delay the evaluation of your situation if you are in this category. We can decide together whether there are advantages to proceeding with planning under the current law, or if a delay in document preparation will be advantageous and efficient.
For clients with planning that is in-process:
- The inclination might be to “wait and see” if planning is mid-stream. We will be evaluating each of these cases to determine whether planning should be implemented immediately (under current law), or if there are potential advantages to waiting until things settle down over the next few months. In most cases, this planning will be completed with the addition of provisions that will allow later adjustments if the Trump or Republican proposals are implemented. If the estate tax is ultimately eliminated, tax planning will center on “asset basis planning” (to favorably impact capital gains taxes which will be substituted for the estate tax) in one form or another.
- “Asset discounting” is often a feature of planning in the current environment, and previously-proposed regulations are already threatening to largely eliminate this “tool” in the near future. It may make sense to complete transactions which are in process to capture the benefits of asset discounting while they remain available under current law.
- Planning often has favorable asset protection features. If this is a significant motivation for the planning that is in process, it is likely we will want to complete the planning so the asset protection characteristics of the planning will be in place while the Trump administration and Congress settle on a tax policy strategy.
- Planning for large and small family businesses often has beneficial features other than estate tax savings. We will want to complete these transactions, with the addition of provisions that will facilitate later adjustment once the tax law changes are complete.
Even in the face of future uncertainty, we do know what the law is right now and that, from a historical perspective, the current estate tax environment is very favorable to those who engage in prudent planning. However, inflexible and irrevocable transactions should be delayed until things settle down.
This is an unprecedented period in American politics. We will continue to watch the tax environment, and we will keep you informed as changes are announced.
[i] The bullet points are excerpted from Steve Leimberg’s Estate Planning Newsletter #2478; Jonathan Blattmachr, Esq. and Martin Shenkman, Esq.
[ii] Republicans generally have not been as eager to repeal the death tax as it generally has been thought to serve an alternative purpose of helping prevent abuse of the income tax through “income shifting”
[iii] http://www.forbes.com/sites/ashleaebeling/2016/11/09/will-trump-victory-yield-estate-tax-repeal/#331b7df22bf2
[iiii] Steve Leimberg’s Estate Planning Newsletter #2478; Jonathan Blattmachr, Esq. and Martin Shenkman, Esq.
