Now that the 2016 election is behind us, some of the policies and proposals of the next administration are starting to take shape. One question that keeps coming up: what is going to happen with the estate tax? The short answer is, of course, we don’t know. However, we do have some ideas and some planning tips for those impacted by the federal estate tax.
Full Repeal Possible
President-elect Trump campaigned on and proposed a complete repeal of the federal estate tax. With Republican control of both the House and Senate, repeal certainly seems possible. The current estate tax exemption is $5.45 million for decedents dying in 2016 at a rate of 40% of the amount over the exemption. If the estate tax is repealed it is not clear whether that would be effective January 1, 2017, put off until 2018, or phased in gradually.
Permanency of repeal is another question. A repeal of the estate tax would require 60 votes in the Senate to avoid a filibuster. Republicans will control 52. Repeal could also be achieved through budget reconciliation. If that occurs, the repeal bill would sunset in 10 years and we could see a situation like that in 2010 when we had the “fiscal cliff”.
It is not clear what would happen with the basis “step-up” rule. The rule allows assets to receive a step-up in basis equal to the fair market value at the time of death if it is included in the person’s estate. Many individuals, especially farmers, hold on to assets like farm land so their heirs can get a step-up in basis at death. If the heir chooses to sell the property shortly after death, they can significantly minimize or even entirely eliminate any capital gains tax as a result from getting a stepped-up basis. If stepped-up basis goes away with the estate tax repeal it could result in some paying more in capital gains tax.
Under the proposal set out by the President-elect, some estates would still be subject to a tax at death. Trump has proposed a capital gains tax at death that would apply to transfers that exceed $10 million, with a possible rate of 20%. For many, planning for capital gains taxes will continue to be important.
Planning in the Near Term
Estate planning advice in the near term, as far as estate taxes are concerned, for most individuals will be to wait and see what happens. An immediate and full repeal of the estate tax could open up new planning techniques for many clients, and gifts that are made now are not reversible. Any high-wealth individuals contemplating making large gifts or establishing irrevocable trusts for avoiding the federal estate tax should likely sit back and see how everything settles out.
When changes are actually made, it would be a good idea to seek advice from an estate planning attorney and other advisers to determine how it will impact your particular situation. Existing wills and trusts would need to be reviewed and possibly updated. Estate planning documents that have QTIP/marital deduction and credit shelter trusts for estate tax purposes may need to be replaced with a more flexible plan. Irrevocable trusts established for estate tax avoidance should also be reviewed to weigh the options.
We will also be keeping a close eye on how any federal estate tax repeal effects state estate taxes. Minnesota and 15 other jurisdictions have estate taxes. Another six states have inheritance taxes. Many of these hinge on the federal estate tax. Minnesota’s estate tax exemption is $1.6 million for decedent’s dying in 2016, with an initial rate of 10% of the amount over the exemption. Planning for the Minnesota estate tax will still be important for anyone that would have been subject to the federal estate tax.