When it was first created in 1916, the estate tax raised funds to finance World War I and restrict a group of powerful families from amassing great wealth. One hundred years later, both the incoming president and Republicans in the House of Representatives have proposed ending the estate tax.
The Wall Street Journal, in “Strategies for Playing Trump’s New Estate-Tax Plans,” notes that estate tax repeal seems “virtually certain.” While there’s never any 100% guarantee that anything proposed in Congress will take place, it does seem likely that this will occur. But the federal estate tax is not what most Americans have to worry about. In the meantime, wills need to be drafted, and estate plans still need to be made.
If the current estate tax is repealed, it will give a hefty tax cut to only the very wealthiest millionaires and billionaires. This includes Trump and several members of his proposed cabinet, along with a few dozen members of Congress. In 2014, 17 senators and 43 representatives reported family assets ranging from at least $5 million to $10 million or more.
It’s a little less clear what may happen to the gift tax. The gift tax applies to transfers during one’s lifetime and to an income-tax provision known as the “step-up,” which allows assets held at death to bypass capital-gains tax. This applies to all assets (except not-yet-taxed retirement funds), even those that have been held for years and are highly appreciated. Trump’s proposal looks to eliminate the step-up above an exemption of up to about $10 million. Beyond that, the deceased’s cost of the asset (the starting point for measuring capital-gains tax) would transfer to the heir.
With these uncertainties, here are a few planning tips:
Sign a will. It’s important to have a valid will, and if you’re concerned about what Congress will do, think about adding in flexibility, like allowing an executor or trustee latitude to make changes.
Temporarily avoid taxable gifts. Don’t make irrevocable moves that risk being subject to gift taxes, unless there is an important rationale, like transferring shares in a company that is about to go public.
Ease up on discounts. Early on in 2016, the Treasury proposed to curb “valuation discounts,” which are applied by the wealthy to lower estate and gift taxes. These regulations are not expected to survive.
Timing is Uncertain. This is the challenging part. In addition to not knowing what the final outcome will be, there have been times when estate tax changes have been retroactive, and times when they have not started until a set date in the near future. Will there be sunset provisions in the acts, meaning that the tax changes will end at some point in time? The only thing we can be sure of at this time, is that we do not know exactly what will occur or when.
In the meantime, make sure that your wills are signed, beneficiary designations are up-to-date and other documents are properly executed. When changes are made, you may or may not need to update your will, depending on the changes and your personal situation.
Reference: The Wall Street Journal (December 9, 2016) “Strategies for Playing Trump’s New Estate-Tax Plans”