April 3, 2017 • Michael J. Nathanson, Ian D. Barclay, Cary P. Geller
Given the results of last November’s election, a repeal of the federal estate tax is now a distinct possibility faced by an entire generation of people who, only a few months ago, were planning for potential increases to the tax. President Donald Trump and several other prominent government officials have called for a complete repeal of the so-called federal “death tax,” which, aside from 2010, has been in place for about a century. Given the apparent consensus within the majority party about repealing the estate tax, many people are understandably wondering whether traditional “estate planning” will become a thing of the past. This is a reasonable question, but, for a variety of important reasons discussed below, the answer is a resounding “no”—estate planning will continue to be an integral part of the financial planning process for the foreseeable future. 1. The Uncertain Timing Of The Repeal Even if a complete repeal is enacted and signed into law, the timing of any such repeal remains uncertain at best. For budgetary, political and procedural reasons, among others, the effective date of any repeal could be delayed, staged over time or even made contingent on factors such as the budget. The uncertain timing could force an exercise in planning for multiple potential repeal scenarios. 2. Impermanence Of The Repeal Because the Democrats continue to possess sufficient votes in the U.S. Senate to sustain a filibuster, the Republican majority might be forced to use a procedural technicality called “reconciliation” to pass a repeal of the estate tax. If such a procedure is used, then under another technicality the repeal effectively may be limited to only 10 years. And regardless of how repeal happens, there’s no assurance that a future Congress would not undo it. One needs only look at what is happening right now to the Affordable Care Act. 3. The Disguised Estate Tax If the estate tax is repealed, it is likely that the current “basis step-up” associated with the tax will also be repealed. Currently, when an individual dies, the cost basis in his or her assets generally is adjusted to the fair market value of those assets on the date of death. This means that any appreciation on those assets typically escapes capital gains taxation. Many planning professionals believe that if the estate tax is repealed, one of two outcomes can be expected with respect to the basis step-up. First, the heirs/beneficiaries might be required to inherit the assets with a “carryover basis” equal to the lesser of fair market value or the decedent’s basis. Second, the heirs might be allowed to receive the assets with a stepped-up basis, but only after any built-in appreciation is first automatically subjected to capital gains taxation upon the decedent’s passing. Statements by the Trump administration have suggested it leans toward the latter approach. In either case, while the estate tax may be repealed, there likely would be additional capital gains taxes imposed at some point on the assets, effectively amounting to a disguised or substitute estate tax. 4. Gift Taxes While there currently is no clear plan for how the federal estate tax would be repealed, it would likely not be accompanied by a repeal of the federal gift tax. The repeal of gift taxes would be highly complicated, as it would allow individuals to shift the ownership of assets in ways that might produce unintended results. For example, the federal government likely would not want to allow a parent to transfer assets to a child so that the child could sell them and pay capital gains taxes at a lower rate, only to turn around and then transfer the sale proceeds right back to the parent. For this reason, gift taxes are likely to remain for the foreseeable future. Alternatively, a structure such as the one used in Canada, which creates a deemed sale on transfers between taxpayers (other than spouses), could be implemented. It is also not clear whether the generation-skipping transfer tax (GST) would be repealed along with the estate tax. Like the gift tax, it could be retained, at least in part. 5. State Taxes Keep in mind also that we have been discussing only the possible repeal of the federal estate tax. Many states also impose inheritance taxes, which still require planning and attention. Even people living in states without their own estate taxes must be careful, as some states have become quite aggressive about imposing the taxes on individuals who don’t claim residency with them but otherwise have substantial connections. At a minimum, these states are likely to impose estate taxes on non-residents who, when they died, owned real and other physical property that fell under the states’ jurisdiction. First « 1 2 » Next
Given the results of last November’s election, a repeal of the federal estate tax is now a distinct possibility faced by an entire generation of people who, only a few months ago, were planning for potential increases to the tax. President Donald Trump and several other prominent government officials have called for a complete repeal of the so-called federal “death tax,” which, aside from 2010, has been in place for about a century. Given the apparent consensus within the majority party about repealing the estate tax, many people are understandably wondering whether traditional “estate planning” will become a thing of the past. This is a reasonable question, but, for a variety of important reasons discussed below, the answer is a resounding “no”—estate planning will continue to be an integral part of the financial planning process for the foreseeable future. 1. The Uncertain Timing Of The Repeal Even if a complete repeal is enacted and signed into law, the timing of any such repeal remains uncertain at best. For budgetary, political and procedural reasons, among others, the effective date of any repeal could be delayed, staged over time or even made contingent on factors such as the budget. The uncertain timing could force an exercise in planning for multiple potential repeal scenarios.
2. Impermanence Of The Repeal Because the Democrats continue to possess sufficient votes in the U.S. Senate to sustain a filibuster, the Republican majority might be forced to use a procedural technicality called “reconciliation” to pass a repeal of the estate tax. If such a procedure is used, then under another technicality the repeal effectively may be limited to only 10 years. And regardless of how repeal happens, there’s no assurance that a future Congress would not undo it. One needs only look at what is happening right now to the Affordable Care Act.
3. The Disguised Estate Tax If the estate tax is repealed, it is likely that the current “basis step-up” associated with the tax will also be repealed. Currently, when an individual dies, the cost basis in his or her assets generally is adjusted to the fair market value of those assets on the date of death. This means that any appreciation on those assets typically escapes capital gains taxation. Many planning professionals believe that if the estate tax is repealed, one of two outcomes can be expected with respect to the basis step-up. First, the heirs/beneficiaries might be required to inherit the assets with a “carryover basis” equal to the lesser of fair market value or the decedent’s basis. Second, the heirs might be allowed to receive the assets with a stepped-up basis, but only after any built-in appreciation is first automatically subjected to capital gains taxation upon the decedent’s passing. Statements by the Trump administration have suggested it leans toward the latter approach. In either case, while the estate tax may be repealed, there likely would be additional capital gains taxes imposed at some point on the assets, effectively amounting to a disguised or substitute estate tax.
4. Gift Taxes While there currently is no clear plan for how the federal estate tax would be repealed, it would likely not be accompanied by a repeal of the federal gift tax. The repeal of gift taxes would be highly complicated, as it would allow individuals to shift the ownership of assets in ways that might produce unintended results. For example, the federal government likely would not want to allow a parent to transfer assets to a child so that the child could sell them and pay capital gains taxes at a lower rate, only to turn around and then transfer the sale proceeds right back to the parent. For this reason, gift taxes are likely to remain for the foreseeable future. Alternatively, a structure such as the one used in Canada, which creates a deemed sale on transfers between taxpayers (other than spouses), could be implemented. It is also not clear whether the generation-skipping transfer tax (GST) would be repealed along with the estate tax. Like the gift tax, it could be retained, at least in part.
5. State Taxes Keep in mind also that we have been discussing only the possible repeal of the federal estate tax. Many states also impose inheritance taxes, which still require planning and attention. Even people living in states without their own estate taxes must be careful, as some states have become quite aggressive about imposing the taxes on individuals who don’t claim residency with them but otherwise have substantial connections. At a minimum, these states are likely to impose estate taxes on non-residents who, when they died, owned real and other physical property that fell under the states’ jurisdiction.
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