Many high-net-worth individuals and families, as well as estate planning practitioners, may remember — all too well — the uncertainty surrounding the federal estate tax that stemmed from the sunset of the Bush tax cuts in 2010. Now, we again find ourselves in a period of uncertainty. Donald Trump’s election to president and the Republicans’ control of Congress have created an ideal environment for significant tax reform, and many are calling for complete repeal of the estate tax.
While the power shift in Washington has tipped in favor of estate tax repeal, Congress’ recent inability to enact healthcare reform legislation casts some doubt on its ability to execute plans for tax reform. Still, if we’ve learned anything so far from this new administration, it's that there’s no good way to predict what will happen, and we need to be prepared for whatever changes may occur.
Even before the November election, House Republicans had introduced a tax reform package titled, “A Better Way,” which included estate tax repeal. Since President Trump’s inauguration, several other bills calling for estate tax repeal have been introduced. The exact shape that reform may take is still unknown, since some bills call for complete repeal of estate, gift, and generation-skipping transfer tax, while others leave the gift tax intact to prevent taxpayers from circumventing the income tax by shifting assets to family members in a lower tax bracket.
In addition, President Trump’s campaign website states that he would “repeal the death tax, but capital gains held until death and valued over $10 million will be subject to tax.” The statement is unclear; it could mean that carryover basis rules would apply, eliminating the “step-up” in basis that’s now afforded to assets held at death, or it could mean that any unrealized capital gains held at death would be recognized. The latter would be an entirely new concept for the U.S. tax system, but it’s not completely unheard of — it would mirror more closely the Canadian tax system.
The introduction of estate tax repeal bills in Congress is not new or unusual. Republicans have long called for repeal and have consistently introduced such bills in the past. The question becomes, is the chance of one of these bills actually passing higher now than in previous administrations? Many of the income tax reform proposals largely benefit high-income earners, and Republicans likely will face pressure to put more focus on reducing taxes for the middle class rather than eliminating a tax that only affects high-net-worth individuals. Given this dynamic, it's easy to imagine that estate tax repeal might come off the table in favor of tax cuts that will benefit a larger group of taxpayers.
During this period of uncertainty, individuals should avoid transactions that would trigger payment of gift tax. However, they should continue to execute transfers that would not trigger gift tax for which there are significant non-tax reasons, such as asset protection, legacy planning, or business succession.
If estate tax repeal does occur, individuals and families will need to be ready to review their estate plans and make changes based on the new law, particularly to clauses dependent on the federal estate tax exemption amount.
But preparation doesn't mean relaxation, and reviewing your estate plan shouldn't be a once-and-done endeavor. The estate tax, even if repealed, may make a future appearance. The transfer tax system has been around for over 100 years and may very well be re-enacted by a future administration.