On November 8, 2016, the estate planning world was turned upside down. The election of a new President and the current majority in Congress creates tremendous potential for change in 2017.
These include but are not limited to changes that affect estate tax, individual income tax, taxation of capital gains, business taxation, continued viability of the stretch IRA and even elder law. The enormity and seeming uncertainty of the potential changes leave many advisors suggesting that we wait and see what happens next year before planning for your estate. This is in part based upon the notion that your plan should be based upon and designed to work under the laws in effect when the plan is drafted. However, your estate plan is actually tested based upon the laws in effect when you die and not when it was drafted. A very different concept.
If the estate tax is repealed now, will it return in eight (8) or perhaps even four (4) years with a new administration? Will the gift tax be repealed? When would repeal take place or be effective? As often stated – the only certainty is the potential for change.
Waiting to implement or update an estate plan may result in a death or incapacity without any estate plan or with a plan that is inconsistent with your hopes, desires, dreams, and goals for your family. Waiting may result in an existing plan which is incorrectly based upon the existence of an estate tax which unnecessarily complicates trust administration and needlessly exposes income or assets to creditor claims.
A well-drafted estate plan would now provide distribution and administrative alternatives addressing both how the plan should be administered if there is an estate tax and also if there is no estate tax when you die. The following is a discussion of a few of the most dramatic changes that may occur:
Estate tax repeal
The President-Elect and the Republicans are pushing to repeal the estate tax. Any repeal of the Federal estate tax will almost certainly be tied to significant changes in the way capital gains will be taxed.
While the repeal of the estate tax is very popular and an emotionally charged issue for many, fewer than .2% of the U.S. population pays estate tax. Approximately 5,000 estate tax returns were filed nationally in 2015.
On the other hand, we all pay income tax so the potential change to capital gains taxation is likely to have a wider ranging effect.
Gift tax repeal
Gift tax repeal is possible but less likely because the gift tax is also a backstop to ensure payment of income tax. Without a gift tax, taxpayers may more easily shift income to family members of others with lower income tax rates.
For example, a parent might gift an asset to a child. The child then sells the asset at a lower rate and then gifts the sale proceeds back to the parent.
Capital gains – carry-over basis or deemed transfer at death?
Capital assets traditionally receive a step-up in income tax basis at death. As a result, a sale of that asset upon a parent’s death results in no capital gains tax. Without the estate tax system, the parents’ original cost or another basis would be used to determine the capital gain subject to tax.
Another alternative being considered by Trump’s administration would be a deemed transfer at death triggering capital gains tax even if the property is not sold. This could be exceedingly problematic for maintaining family farms, real property, and even family wealth because the cash needed to pay the tax would not be available.
2017 brings greater planning opportunities to achieve your enlightened dreams
The potential repeal of the estate tax system opens many opportunities to better plan for a family’s fears, dreams, hopes, and aspirations. Helping a client and his or her family achieve their enlightened dreams has always been the true goal of a well-drafted estate plan. In particular, asset protection may be more easily attained without the need to also satisfy estate tax requirements. For example, there no longer be a need to currently distribute income to a surviving spouse to qualify for the marital deduction for estate tax purposes. Distribution income may subject that income to creditor claims and other liabilities. Current distribution may not be needed or appropriate without this estate tax requirement.
As I review all of this I wonder, is it a blessing or curse to be living in interesting times? I hope that this information is helpful in making a positive difference in your life and for your family.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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