Beginning in January 2017, President-elect Donald Trump and a Republican controlled Congress are positioned to shake up the federal tax system. What could Trump’s tax proposals mean for your estate plan?
Current Transfer Taxes: Presently, estates in excess of $5.45 million are taxed at a rate of 40%. Property owned at death receives an adjusted basis (commonly referred to as a “step up” in basis) to the date of death value, which eliminates an additional tax on the capital gains built into appreciated property.
Trump’s Plan: Trump’s proposed tax plan would repeal the federal gift and estate taxes. The plan also would modify the rules with respect to the step up in basis of appreciated property at an individual’s death so that capital gains in excess of $10 million would be subject to a capital gains tax. Contributions at the individual’s death of appreciated assets to a private charity established by the deceased individual or the deceased individual’s family would not avoid the capital gains tax. Trump’s overhaul of the transfer tax system is just a small portion of his comprehensive tax system overhaul which goes further to reduce individual income and corporate tax rates.
The Crystal Ball: At this point, there is much uncertainty. Below are some of the most relevant issues to follow as Trump’s tax plan develops into legislation and law:
- First, since the elimination of a tax often accompanies an off-setting measure, expect there to be trade-offs. Trump has already proposed that the estate tax repeal be accompanied by a repeal of the step up in basis for assets acquired from a decedent and possibly replaced with another taxing mechanism, such as a capital gains tax on appreciated property. There are any number of trade-offs that could accompany an estate tax repeal.
- Second, it is not known when any new tax laws would go into effect, e.g., immediately upon signing into law, January 1 of the following year, or phased out/in over a period of time. Whether the laws will be permanent also remains to be determined.
- Third, it is not known how new tax laws would impact nonresidents of the U.S. who are not U.S. citizens. Currently, nonresident, non-U.S. citizens are subject to U.S. estate tax on real and tangible personal property located in the U.S. as well as on shares of U.S. securities, to the extent such property exceeds $60,000. Estate planning and pre-immigration planning strategies for nonresident, non-U.S. citizens could change significantly.
Your Estate Plan: Even with so much uncertainty, consider taking the following steps now:
- Do not abandon tax year 2016 year-end planning. There is no guarantee that the effort to repeal the estate tax will be successful. For example, it still may be advisable to make planned annual exclusion gifts.
- Review your current estate planning documents. Do they accomplish your goals (under the current tax laws), and would your goals still be accomplished if the estate tax is repealed? Would your plan be unnecessarily complicated and burdensome to administer if the estate tax is repealed?
- Meet with your estate planning attorney. With the tax laws in flux, take this as an opportunity to revisit your estate plan and address any changes in your life circumstances.