In 2001 President George W. Bush tried to repeal the federal estate tax. He was successful — but only for one year, 2010. Then during the administration of President Obama the federal estate tax returned. Under the new estate tax law the rate of tax was reduced from an earlier maximum rate of 55% to 40% and the exemption from the estate and gift tax was increased from the prior (2009) highest exemption of $3,500,000 to $5,000,000. The exemption is of course doubled for a married couple since the exemption is available to each spouse. For taxable gifts made in, or for individuals who die in, 2017 the exemption is $5,490,000 and in 2018 the exemption will be $5,600,000.

Under H.R.-1, called the “Tax Cuts and Jobs Act,” which the House of Representatives released on November 2, 2017, until 2023 the federal, estate, gift and generation skipping tax exemption would double ‎for each individual. And in 2024 the federal estate tax would again — vanish. So would the generation skipping tax — but the gift tax would remain with a 35% rate.

Under H.R.-1 the step-up in basis at death remains in effect. The step-up in basis eliminates capital gains tax on pre-death appreciation when a decedent’s assets are sold after death. It has commonly been thought that the federal estate tax and the step-up in basis are a trade-off — in exchange for a federal estate tax to be paid at death, capital gains tax on sales after death are eliminated. Under H.R.-1 there would be neither an estate tax nor a capital gains tax on pre-death appreciation.

On November 9th the Senate Finance Committee issued its version of the “Tax Cuts and Jobs Act” (JCX-51-17). Under this proposed legislation the federal estate, gift and generation skipping tax exemption would double, but, unlike the House version, the federal estate and generation skipping tax would not be repealed.

Because of procedural rules which apply to the Senate and because of the slim Republican majority, if estate tax repeal passes both the House and the Senate, it likely will not be permanent. The repeal will be “sunset,” so to speak. And just as President Obama resurrected the federal estate tax, so may a future presidential administration do the same. It is, of course, impossible to say what will become of the Tax Cuts and Jobs Act as it wends its way through the halls of the Capitol on its way to President Trump’s desk, if it ever gets there.

What are the takeaways?

  1. Do not take any steps you might regret if it ends up the federal estate tax does not apply to you or your spouse at death.
  2. Subject to investment considerations and the ability to harvest losses to offset gains, hold on to low-basis assets in order to take advantage of the step-up in basis at death.
  3. Consider “upstream” gifts or sales to parents and grandparents (or trusts for their benefit) whose estates are under the amount of the exemption in order to take advantage of the step-up in basis at their deaths. Those individuals might in their wills and revocable trusts create generation skipping trusts for their children, grandchildren and more remote descendants to pass those assets back downstream in a tax-efficient way (taking into account the recommendations made in number 5 below).
  4. If the current legislation, or some version of it, becomes law, consider making gifts to take advantage of the doubling of the exemption.
  5. Irrevocable trusts should be drafted to anticipate the changing tax climate over years and decades and how those changes could affect trust beneficiaries. For example, consider including in trust instruments a “Trust Protector” or “Independent Trustee” with the powers:
    • To grant to trust beneficiaries a “general power of appointment” which will cause the beneficiary’s share of a trust to be included in the beneficiary’s estate for federal estate tax purposes and therefore benefit from the basis step-up; or
    • To terminate a trust if the tax purpose the trust was designed to achieve no longer exists; or
    • To transfer the situs of a trust to another state which has tax or non-tax laws which favor the trust or its beneficiaries.
  6. Powers of attorney should grant the “agent” the ability to engage in tax planning if at any point the individual granting the power of attorney (the “principal”) is unable to engage in such planning when changes to the law occur which could benefit the principal or the principal’s estate.

The biggest take away is to build FLEXIBILITY into your estate plan.

Republicans in Congress and the President express a commitment to getting these tax law changes in place by year-end. No doubt they will try, which means, whatever happens or doesn’t happen, the process will move quickly. And no doubt, more to come ….