Eliminating the estate and generation-skipping transfer taxes, as proposed by the Trump administration on September 27 in its nine-page “Unified Framework For Fixing Our Broken Tax Code,” would bring significant changes to planning for the wealthiest clients.
Consider life insurance. “There would be less need for it. Clients would no longer need liquidity to pay death taxes,” says John Przybylski, the director of financial planning at Pathstone Federal Street in Potomac, Md.
Charitable planning for large estates would likewise diminish. “For example, charitable lead trusts, which are effective in eliminating or reducing estate tax while providing funds to charity and family, would be much less attractive without the estate tax” in place, says CPA John R. Anzivino, estate and trust principal at Kaufman Rossin in Miami. “The estate, gift and GST taxes are definitely a motivating factor in charitable giving. They make gifts less costly to the family.”
Regarding trusts, they may no longer be needed for federal estate tax planning. “However, they may still be beneficial for clients subject to state estate tax or inheritance tax,” Anzivino says, “and clients would still create trusts for asset protection as well as for beneficiaries who lack the ability to manage wealth or who have special needs.”
Repeal of the generation-skipping tax may promote the creation of GST-exempt dynasty trusts that could be grandfathered from a future reinstatement of the tax, Anzivino adds. Reinstatement might come at the hands of a Congress of tomorrow. Or, given the multi-trillion-dollar price tag of the September 27 proposals, a sunset provision that resurrects the estate and GST taxes after a decade could be part of final legislation.
If these federal transfer taxes disappear, much of the energy advisors now spend on minimizing them will be channeled toward income-tax planning, particularly around the rules regarding the basis of inherited assets, predicts attorney John F. Shoro, practice-area leader for estate, financial and tax planning at Bowditch & Dewey LLP in Worcester, Mass.
Under current federal law, a client’s income-tax basis in inherited property is its value on the decedent’s date of death. In practical terms, this means passed-down assets can be sold immediately by heirs without triggering capital gains tax.
But the proposed framework doesn’t mention basis. Many planners believe the current rule would get tossed out along with the estate tax, which would bring new income-tax implications to the sale of bequeathed assets. “One of the biggest questions surrounding the elimination of the estate tax is the impact on basis,” Shoro says.
Another major unknown is the fate of the gift tax, something else not addressed. Przybylski says, “If the gift tax remains in place, many of the planning techniques for minimizing taxes on lifetime gifts would continue to be utilized.”
Any proposals that are enacted will likely keep advisors busy.