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Post-election uncertainty complicates year-end wealth transfer planning for 2016 and beyond

November 17, 2016 Article 5 min read
Dawn Jinsky Wealth Management

A significant amount of uncertainty has accompanied our election of a new president. For example, how does that change in leadership affect your year-end wealth transfer planning? Here’s how we view the current landscape and how it may change as we look toward 2017.

The Estate Tax

It’s well known that Republicans have long been in favor of an estate tax repeal, so the combination of a Republican president and a Republican majority in Congress creates the potential for such a change. Mr. Trump has stated that he wants to accomplish tax reform in the first 100 days after he takes office on January 20, 2017.  His plan calls for a repeal of the “death tax,” a 40% tax levied on estates in excess of $5,450,000 per person ($10,900,000 for married couples).  This repeal is also part of the blueprint that the House Republicans have submitted under Paul Ryan and may be part of the Senate plan when details are finally released.  

Instead of an estate tax based on the value of assets you own, the Trump administration proposes to subject large estates to capital gains tax when the assets are eventually sold by beneficiaries. To clarify, Mr. Trump’s plan changes the “step-up” in cost basis rules that currently provide favorable income tax advantages for both small and large estates.  Under the current rules, unrealized capital gains on appreciated assets held at death escape income tax, and beneficiaries only pay capital gain on post-death appreciation when they sell the assets.  Under Trump’s plan, large estates with unrealized capital gains will now have income tax imposed on the capital gains of assets sold post-death — beyond a step-up allowance of about $5 million per person or $10 million per couple. This means that, if you have a larger estate, your estate planning strategy could involve monitoring your balance sheet for unrealized gains to ensure income tax opportunities are identified and captured.  

The Gift Tax

Even if the Federal Estate Tax is repealed, the Federal Gift Tax may survive indefinitely to prevent income tax abuse.  The gift tax is currently interdependent with the estate tax, meaning that a lifetime gift, generally speaking, counts against the amount you can transfer estate tax free at your death.  Your lifetime gifting allowance, sometimes referred to as your unified credit, will likely still be adjusted annually for inflation.  For example, for 2017, the lifetime gifting allowance has been adjusted for inflation to $5,490,000 per person ($10,980,000 for married couples) with a 40% transfer tax applied to cumulative taxable gifts that exceed these limits. Since the gift tax prevents donors from temporarily shifting taxable income to those in lower income tax brackets before and after a taxable transaction, it seems likely that the final tax bill may incorporate a gift tax rate that mirrors the top income tax rate to discourage attempts to shift taxable income to children, for example, who might be in a lower tax bracket than their parents.

Update on the Proposed Treasury Regulations threatening to reduce valuation discounts 

The Trump presidency and a Republican-controlled House and Senate will likely make it challenging for the Treasury to adopt the proposed regulations they introduced in August of this year that threatened to reduce and/or eliminate valuation discounts on transfers of family-controlled business interests to related parties. During the public comment period this fall, the Treasury received thousands of written comments from individuals, business owners, professional organizations such as the AICPA, and advisory firms like Plante Moran discussing how the regulations, if adopted as final in their proposed form, would hurt family owned businesses. On December 1, the Treasury will be hearing oral comments in Washington D.C.  Plante Moran has requested to testify at the hearing to discuss how the proposed legislation, as written, is flawed, unfair, and unduly burdens business owners.

The process of finalizing proposed regulations can takes months, if not years. Until the Treasury fulfills its legal obligation to respond meaningfully to relevant and significant comments they receive during the public comment period, the proposed regulations cannot be finalized. A consistent approach to valuation methodology like we have today is important for gifting or selling business interests, for income tax basis planning, and for successful business transitions. The proposed regulations require a great deal of clarification, which typically takes time for the Treasury to complete.

Beyond the procedural hurdles that the proposed regulations face, if adopted as final in their current form, the regulations would potentially encounter an unsympathetic Republican-controlled House and Senate that could pass legislation overturning them.  Even before the election, more than 40 Republican senators wrote to the Treasury Secretary asking him to abandon the proposed regulations, and three bills were introduced (two in the House and one in the Senate) either nullifying the proposed regulations if passed or blocking IRS funding to work on them.  

Year-end moves

The only guarantee that comes with a new president is that there will be change. Whether a tax bill is agreed upon and passed in the first 100 days will depend on how quickly consensus is achieved in Congress. Negotiations are likely, and the future of the estate tax will undoubtedly be included in these discussions. 

What does this mean for you? We recommend that you reach out to your professional advisory team for input on your specific situation, but here are few things you may want to consider:

  • If you were aiming to complete a transfer by December 31 because you were concerned about higher tax rates under a Democratic presidency or the elimination of valuation discounts, you may choose not to complete these before year end. Given the change in the political landscape, you may be less likely to want to execute a transaction that would incur gift tax, unless other factors make the completion of the transfer this year important. Within the next few months, we hope to have more visibility into tax law changes that will allow us to provide more insight and guidance than we can currently.
  • If you have previously decided to complete a transaction by December 31, you may want to consider moving forward with these as planned, particularly if you have finalized decisions on legal structuring, have a business valuation underway, and aren’t concerned that the asset you’re transferring will jeopardize your financial independence. This may be especially true if your year-end gift was not being motivated by the potential implementation of the proposed regulations reducing valuation discounts.
  • If you’ve already completed a significant transfer this year that requires a gift tax return, make sure that you put filing a 2016 gift tax return on your checklist as you’ll likely want to file that at the same time as your 1040.   

Plante Moran Wealth Management provides this information to convey general information about financial planning. It is not intended to provide a specific recommendation nor does it constitute legal or tax advice. The strategy described may not be appropriate for you. Before making any decisions, you should consult a representative of Plante Moran Wealth Management regarding your personal situation or consult with your personal legal and/or tax advisor.

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